A  HISTORY  OF 
MODERN  BANKS  OF  ISSUE 


BY 

CHARLES  A.  CONANT 

»• 

FORMER     MEMBER     OF     COMMISSION     ON     INTERNATIONAL     EXCHANGE 

MEMBER    SOCIETE   o'ECONOMIE    POLITIQUE    DE    FRANCE,    ETC., 

AUTHOR   OF    "  PRINCIPLES   OF   MONEY  AND    BANKING," 

"  WALL    STREET    AND  THE    COUNTRY,"    ETC. 


FIFTH  EDITION 

REVISED  AND  ENLARGED  WITH  NEW  CHAPTERS  ON  THE  FEDERAL 
RESERVE  ACT  AND  THE  BANKS  IN  THE  EUROPEAN  WAR 


G.  P.  PUTNAM'S  SONS 

NEW  YORK  AND  LONDON 

Iknicfeerbocfeer  press 

1915 


en 


COPYRIGHT,  1896,  BY 
G.  P.  PUTNAM'S   SONS 


COPYRIGHT,  1908.  BY 
G.  P.  PUTNAM'S   SONS 


COPYRIGHT,  1909,  BY 
G.  P.  PUTNAM'S   SONS 


COPYRIGHT,  1915,  BY 
G.  P.  PUTNAM'S  SONS 


Ubc  ftnicfeerbocfeer  f>rcs0,  flew  KJorfc 


To 
MY  MOTHER 


345088 


PREFACE  TO  THE  FOURTH  EDITION. 


THE  declaration  made  in  the  first  edition  of  this  work, 
published  in  1896,  that  financial  and  economic  subjects 
promised  to  be  4  *  the  paramount  issues  of  American 
politics  for  many  years  to  come,"  has  been  verified  by  events. 
While  the  United  States  have  taken  some  long  steps  in  the 
direction  of  a  sound  monetary  system,  the  question  of  a  proper 
banking  currency  still  remains  unsettled  and  is  at  this  moment 
under  investigation  by  a  special  commission  authorized  by 
Congress.  It  seems  proper,  therefore,  that  a  summary  of  the 
experience  of  the  world  in  banking  should  be  presented  to 
the  public  which  includes  the  events  of  the  past  twelve  years 
as  well  as  those  of  earlier  times.  The  fact  stated  in  the 
preface  to  the  first  edition,  that  there  is  no  work  in  English 
covering  exactly  the  ground  covered  by  Modern  Banks  of 
Issue,  has  remained  substantially  true.  One  larger  and  more 
elaborate  work,  written  by  different  authors,  and  a  few  bald 
summaries  of  facts  and  statistics  have  been  published,  but, 
apart  from  these,  there  is  no  other  volume  which  brings 
together  in  connected  and  accessible  form  the  record  of  the 
banking  experiences  of  the  world. 

Important  events  have  taken  place  in  both  banking  and 
political  history  during  the  past  twelve  years.  The  United 
States  have  become  competitors  for  the  commercial  empire 
of  the  Orient  to  a  degree  which  has  justified  much  more 
extended  accounts  than  were  given  before  of  banking  and 
currency  conditions  in  Oriental  countries.  The  note-issuing 
systems  of  Switzerland,  Sweden,  and  Mexico  have  been 
completely  reconstructed,  and  important  changes  have  been 


VI  PREFACE    TO    THE  FOURTH  EDITION. 

made  in  Russia,  Austria-Hungary,  Japan,  and  other  coun- 
tries. In  this  new  edition  of  Modern  Banks  of  Issue,  not 
only  have  such  events  been  brought  down  to  date,  but  more 
attention  has  been  given  than  in  the  first  edition  to  several 
phases  of  banking  development,  notably  on  the  side  of  dis- 
count policy  and  on  that  of  the  division  of  profits  between 
the  bank  and  the  state.  In  practically  every  European  state, 
even  where  there  has  been  no  radical  change  in  monetary 
and  banking  policy,  the  opportunity  which  has  arisen  to 
revise  the  charters  of  the  banks  has  been  availed  of,  in  the 
case  of  the  great  central  banks,  to  narrow  the  privileges  and 
profits  which  were  originally  granted  to  the  shareholders. 
The  facts  in  this  regard  are  presented  in  this  edition  with 
much  greater  approach  to  completeness  than  in  the  earlier 
editions  of  this  work. 

The  past  twelve  years  have  contributed  much  to  strictly 
monetary  as  well  as  to  banking  history.  Questions  whose 
solution  was  doubtful  and  disputed  have  been  settled  to  the 
satisfaction  of  intelligent  men.  The  gold  standard,  which 
was  described  twelve  years  ago  as  "  a  conspiracy  against  the 
human  race,"  has  been  adopted  in  succession  within  that 
time  by  the  United  States,  Russia,  Austria-Hungary,  Japan, 
and  Mexico.  Practically  the  only  country  remaining  upon 
the  silver  standard  is  China,  which  is  without  a  national 
monetary  system,  and  even  as  these  pages  go  to  press 
despatches  from  China  indicate  that  the  government  is 
planning  such  a  national  system  to  be  based  ultimately 
upon  gold. 

This  history  of  banking  is  not  intended  as  a  treatise  on 
coinage,  except  so  far  as  changes  in  coinage  laws  have  been 
accomplished  through  banking  agencies  and  have  affected 
banking  history.  The  great  banks  of  the  world  have  in- 
evitably, however,  been  powerful  factors  in  the  monetary 
changes  which  have  been  accomplished  in  recent  years. 
Especially  has  this  been  the  case  where  the  new  monetary 
systems  have  depended  in  some  degree,  as  in  the  case  of 
British  India,  the  Philippines,  Mexico,  Russia,  and  Austria- 
Hungary,  upon  the  control  of  the  market  for  exchange.  In 


PREFACE    TO    THE  FOURTH  EDITION.  vil 

this  field  experience  has  developed  what  is  practically  a  new 
monetary  system  and  has  established  new  principles  to 
govern  the  issue  and  distribution  of  money.  The  gold  ex- 
change system,  inaugurated  with  halting  stops  in  British 
India  in  1893,  has  been  adopted  with  various  modifications 
in  other  countries  and  has  stood  unshaken  the  test  of  a  crisis 
in  the  world's  markets  and  a  local  crisis  in  production  in 
India.  Those  events  it  has  seemed  the  legitimate  function 
of  this  work  to  set  forth. 

Owing  to  the  importance  of  the  events  of  the  past  dozen 
years,  and  the  increased  space  given  to  the  banking  systems 
of  Mexico  and  the  Orient,  it  has  seemed  advisable  to  confine 
the  scope  of  this  work  to  narration.  To  this  end  there  have 
been  eliminated  the  three  chapters  on  banking  theory  which 
appeared  in  the  earlier  editions:  "  The  Theory  of  a  Banking 
Currency,"  "  Crises  and  Their  Causes,"  and  "  The  Advan- 
tages of  a  Banking  Currency."  A  more  nearly  complete 
and  satisfactory  presentation  of  the  author's  views  on  mone- 
tary and  banking  theory  will  be  found  in  the  separate  work 
in  two  volumes  on  The  Principles  of  Money  and  Banking, 
published  in  1905,  and  issued  on  the  continent  of  Europe  in 
the  French  translation  of  Dr.  Raphael  Georges-Levy. 

In  sending  forth  this  work  again  to  the  public  in  a  con- 
dition abreast  with  recent  monetary  history,  the  author  can 
only  renew  the  hope  that  it  will  contribute  in  some  degree 
to  the  diffusion  of  those  sound  views  of  banking  whose 
adoption  into  law  is  essential  to  the  economic  progress  of 
our  country. 

CHARGES  A.  CONANT. 
New  YORK,  February  i,  1909. 


PREFACE  TO  THE  FIFTH  EDITION. 


EIGHTEEN  years  have  elapsed  since  the  publication  of 
the  first  edition  of  A  History  of  Modern  Banks  of 
Issue.  They  have  been  years  of  remarkable  progress 
in  monetary  science.  The  United  States,  which  for  a  long 
time  lagged  behind  other  advanced  commercial  countries  in 
the  development  of  her  monetary  system,  has  finally  adopted 
a  comprehensive  measure  of  centralized  banking  and  note 
issue,  which,  if  wisely  administered,  will  put  her  bankers  in 
a  position  to  compete  on  something  like  an  equal  plane  with 
bankers  of  other  countries,  and  which  will  afford  the  means 
of  guarding  her  gold  stock  and  removing  forever  the  menace 
of  such  humiliating  conditions  of  monetary  inefficiency  as 
were  developed  in  the  crisis  of  1907. 

So  important  is  this  step  in  the  progress  of  American 
finance,  that  a  new  chapter  has  been  added  to  this  work  in 
this  fifth  edition,  outlining  the  scope  and  effects  of  the 
Federal  Reserve  Act  of  December  23,  1913,  by  which  a  sys- 
tem of  centralized  banking  has  been  established.  The  long 
process  of  evolution  in  American  banking  education,  begin- 
ning just  before  the  appearance  of  the  first  edition  of  A 
History  of  Modern  Banks  of  Issue,  in  1896,  has  not  been 
ignored.  The  provisions  of  the  emergency  act  of  May  30, 
1908,  known  as  the  Aldrich-Vreeland  Law,  are  set  forth 
under  the  history  of  the  national  banking  system,  and  an 
analysis  is  made  of  the  plan  of  the  National  Monetary  Com- 
mission, many  of  whose  provisions  were  adopted  in  the 
Federal  Reserve  Act. 

In  several  of  the  principal  foreign  countries,  revisions  of 


X  PREFACE  TO  THE  FIFTH  EDITION. 

the  national  bank  charters  have  occurred  during  the  past  few 
years,  which  have  emphasized  the  growing  tendency  to  more 
rigid  government  control  over  finance  and  a  larger  participa- 
tion of  the  state  in  the  profits  of  note  issue.  These  changes 
in  the  charters  of  the  banks  of  France,  Germany,  and  Austria- 
Hungary,  which  have  been  made  since  the  appearance  of  the 
fourth  edition  of  this  work,  are  set  forth,  and  the  statistics 
for  these  countries  have  been  brought  up  to  date. 

Changes  in  the  banking  law  of  our  Canadian  neighbors, 
the  adoption  of  a  stable  monetary  system  in  Nicaragua,  and 
the  revision  of  the  currency  system  of  British  India  are  set 
forth  as  fully  as  space  permits.  In  this  edition,  it  has  not 
been  attempted  to  make  all  the  minor  corrections  in  statistics 
which  might  be  called  for  by  the  lapse  of  five  years  since  the 
appearance  of  the  fourth  edition;  but  the  effort  has  been 
made  to  set  forth  important  changes  of  law  and  policy  and 
serious  interruptions  to  the  normal  functioning  of  the 
monetary  system  such  as  has  occurred  in  Mexico. 

The  remarkable  series  of  events  arising  from  the  war  in 
Burope,  which  seemed  for  a  moment  likely  to  shake  the 
modern  structure  of  credit  to  its  foundations,  occurred  when 
the  new  edition  of  this  book  was  nearly  ready  for  the  press  ; 
and  its  publication  was  delayed  in  order  that  a  chapter  might 
be  added  on  "  The  Banks  in  the  European  War."  The  war 
has  been  productive  of  many  striking  lessons  in  the  field  of 
monetary  history  and  none  more  striking  than  the  success  of 
the  system  of  central  banking  in  sustaining  the  entire  fabric 
of  money  and  credit  under  conditions  of  strain  never  before 
encountered  in  the  history  of  the  world.  The  story  of  this 
test  and  its  application  to  American  experience,  it  is  the  aim 
of  the  new  chapter  to  set  forth. 

CHARLES  A.  CONANT. 

NEW  YORK,/a»«ary  15,  1915. 


CONTENTS. 


CHAPTER  I. 

PAGE 

THE  BEGINNINGS  OF  BANKING i 


CHAPTER  II. 
ANCIENT  AND  MODERN  BANKING  IN  ITAI,Y  .        .         .        .17 

CHAPTER  III. 
BANKING  IN  FRANCE 32 

CHAPTER  IV. 
FIRST  CENTURY  OF  THE  BANK  OF  ENGLAND  78 

CHAPTER  V. 
SECOND  CENTURY  OF  THE  BANK  OF  ENGLAND       „        .        .     100 

CHAPTER  VI. 
THE  SCOTCH  BANKING  SYSTEM       ......     142 

CHAPTER  VII. 
BANKING  IN  IRELAND 0        .171 

CHAPTER  VIII. 

THE  BANKS  OF  GERMANY 186 

xi 


CONTENTS. 


CHAPTER  IX. 

PACK 
THE  AUSTRO-HUNGARIAN   BANK        .  .219 


CHAPTER  X. 
BANK  OF  RUSSIA     .  =251 

CHAPTER  XI. 
THE  BANKS  OF  NORTHERN  EUROPE      ...        0        .     276 

CHAPTER  XII. 
THE  BANKS  OF  SOUTHERN  EUROPE 302 

CHAPTER  XIII. 

/ 

THE  BANK  OF  THE  UNITED  STATES 334 

CHAPTER  XIV. 
THE  STATE  BANKING  SYSTEMS  .    358 

CHAPTER  XV. 

THE  NATIONAL  BANKING  SYSTEM          .  396 

^ 

CHAPTER  XVI. 
THE  CANADIAN  BANKING  SYSTEM         .  44$ 

CHAPTER  XVII. 
THE  BANKING  SYSTEM  OF  MEXICO       .        .  .480 

CHAPTER  XVIII. 
BANKING  IN  LATIN  AMERICA  .  49$ 

CHAPTER  XIX. 
BANKING  IN  AFRICA  AND  OCEANICA 535 


CONTENTS.  XJii 

CHAPTER  XX. 

PAGE 

BANKING  IN  JAPAN  AND  KOREA  ......     555 

CHAPTER  XXI. 
BANKING  AND  EXCHANGE  IN  THE  ORIENT  ....    569 

CHAPTER  XXII. 
THE  EARI.Y  CRISES  OF  THE  LAST  CENTURY        .        .        .611 

CHAPTER  XXIII. 
THE  LATER  CRISES  OF  THE  LAST  CENTURY        .        .        .    636 

CHAPTER  XXIV. 
THE  CRISIS  OF  1893 668 

CHAPTER  XXV. 
THE  CRISIS  OF  1907 698 

CHAPTER  XXVI. 
THE  FEDERAL,  RESERVE  ACT          .       .  .       .       .722 

CHAPTER  XXVII. 
THE  BANKS  IN  THE  EUROPEAN  WAR 738 

LIST  OF  AUTHORITIES 755 

INDEX 763 


HISTORY  OF  MODERN  BANKS 
OF  ISSUE. 

CHAPTER  I. 

THE   BEGINNINGS   OF   BANKING. 

Credit  Instruments  not  a  Modern  Invention — Barly  Forms  of  Bank- 
ing in  Assyria,  Greece,  and  Rome — The  Baked  Clay  Tablets  of 
Babylonia— Survival  of  Banking  Methods  at  Constantinople — 
Origin  of  the  Word  "  Bank  " — Beginnings  of  the  Bank  of  Venice 
— The  Tax  Farmers  and  Financiers  of  the  Middle  Ages — The 
Prohibition  of  I^oans  at  Interest  and  the  Functions  of  the  Jews. 

HE  mechanism  of  credit  dates  back  to  the  civilizations 
of  antiquity.  It  was  much  more  fully  developed  in 
Assyria  and  Babylon  than  in  early  Greece  and  Rome, 
and  after  its  development  in  the  latter  countries  during  their 
periods  of  military  and  commercial  ascendancy  suffered  a 
new  eclipse  during  the  interruption  of  communications  in 
the  Dark  Ages.  It  was  left,  however,  for  the  sixteenth 
century  of  our  era  to  develop  the  bank  note  in  something 
like  its  modern  form,  and  for  the  nineteenth  century  to  spread 
its  use  over  the  civilized  world. 

^Assyria,  as  early  as  the  seventh  and  even  the  ninth  century 
before  Christ,  possessed  a  system  of  commercial  instruments, 
which  included  promissory  notes,  bills  of  exchange,  and 
transfer  checks,  not  unlike  the  modern  bank  check.  As 
this  system  was  in  operation  before  the  use  of  coined  money, 
these  documents  usually  stipulated  for  the  payment  of  a 


2  HISTOR  Y  OF  MODERN  BA  VKS  OF  ISSUE. 

given  weight  of  silver  or  copper. '  They  were  inscribed,  not 
on  paper,  but  on  small  clay  tablets  about  the  size  of  a 
piece  of  toilet  soap.  After  the  contract  had  been  written  in 
the  soft  earth,  it  was  baked  so  as  to  render  it  unalterable 
and  indestructible.  Such  a  form  of  document  naturally 
could  not  be  subjected  to  endorsement  or  acceptance,  like 
modern  commercial  paper ;  but  this  defect  was  supplied  by 
the  presence  of  witnesses,  usually  having  a  religious  or  legal 
authority.2  The  original  was  placed  for  safety  in  either  the 
temple  or  the  record  chamber  of  the  city,  enclosed  in  a  clay 
envelope  or  case,  while  copies  went  to  one  or  both  the  con- 
tracting parties.  Many  of  these  documents,  preserved  in 
the  British  Museum,  are  records  of  deeds  and  the  partition 
of  real  estate,  but  some  involve  loans  of  silver  at  interest, 
and  these  become  numerous  in  the  reigns  of  Nebuchadnezzar 
and  Nabopolassar  (625-604  B.  c.).3 

While  the  Athenians  and  Romans  were  in  some  respects 
ess  advanced  in  the  mechanism  of  credit  than  the  Kastern 
peoples,  their  surviving  records  are  more  complete.  The 
first  of  the  Greek  bankers  referred  to  in  history  is  Philo- 
stephanos,  who  had  the  honor  of  receiving  into  his  custody 
at  Corinth  a  deposit  of  seventy  talents  from  the  hands  of 
Themistokles.  The  bankers  of  Athens  were  among  the 
most  powerful  in  Greece,  and  the  son  of  the  banker  Pasion 
was  able  to  boast  that  he  could  borrow  where  he  would, 
at  lyampsakos,  at  Phasos,  at  Tenedos,  or  elsewhere,  because 
he  was  the  son  of  Pasion.  The  first  Athenian  bankers,  how- 
ever, were  not  citizens,  but  freedmen  of  Corinthian  and 
Ionian  bankers  who  had  shown  skill  and  acquired  wealth 
at  Athens  as  the  agents  of  their  employers.  Wealth  did  not 
throw  down  social  barriers  for  them  until  evidence  of  their 
patriotism  was  afforded  by  loans  at  low  rates  to  the  state 


1  Vide  forms  of  these  contracts  in  L,enormant,  La  Monnaie  dans 
V  Antiquit^  I.,  114-117. 

2  Ivenormant,  I.,  118. 

3  British  Museum  :  Babylonian  and  Assyrian  Antiquities,  1900 
174-176. 


THE  BEGINNINGS  OF  BANKING.  3 

in  the  hour  of  need.  The  banking  business  was  mingled 
with  large  speculations  in  foreign  trade  and  confused  with 
the  function  of  merchants,  until  the  growth  of  wealth  and 
the  subdivision  of  industries  gradually  erected  it  into  a  dis- 
tinctive profession.1  Many  of  the  stronger  Athenian  bankers 
attained  a  high  degree  of  prosperity  and  their  houses  endured 
for  several  generations. 

yr  One  of  the  first  forms  of  banking  was  the  exchange  of 
foreign  monies  for  domestic  monies  and  the  return  of  the 
foreign  monies  to  the  country  of  origin.  The  narrow  limits 
of  the  Greek  and  Italian  states  made  the  function  of  the 
money-changer  essential  in  international  trade,  and  afforded 
large  opportunities  for  profit.  There  were  many  prejudices 
against  making  trade  too  easy  by  a  uniform  standard,  and 
the  money  of  domestic  use  was  often  different  from  that 
employed  in  foreign  commerce.2  Xenophon  declared  that 
the  larger  number  of  the  cities  of  Greece  had  money  having 
value  only  at  home,  and  that  traders  at  such  places  were 
compelled  in  consequence  to  make  exchanges  in  merchan- 
dise, but  that  Athens  was  an  exception  and  that  her  silver 
drachmas  were  accepted  everywhere. 

The  bankers  in  Athens  were  known  as  rpane^irai  and 
those  in  Rome  as  argentarii  (dealers  in  silver).3  The  bank- 
ing business  was  SUbjectetTTcr  officlal~regulation  in  both 
Athens  and  Rome.  The  Roman  laws  required  the  argen- 
tarii to  produce  their  accounts  for  official  inspection,  and 
prescribed  that  they  should  keep  a  cash-book,  a  deposit- 
book,  and  a  day-book.  The  transfer  of  credits  was  permitted 
at  Athens  by  the  law  of  Solon,  and  commercial  paper  from 
Phoenicia  and  Egypt  was  negotiated  upon  the  Athenian 


1  Cruchon,  22. 

-  Vide  Favre,  La  Genese  de  V Argent,  in  Revue  d'£conomie  Poli- 
tique,  April,  1899,  XIII.,  358. 

y  Cruchon  enumerates  more  than  sixty  titles  of  different  classes 
of  persons  dealing  with  monetary  matters  at  Rome.  Some  of  these 
were  public  officials,  and  the  exact  character  of  the  business  done 
changed  from  time  to  time,  even  where  old  names  were  retained. — 
Les  Banques  dans  VAntiquite,  35. 


4  HISTOR  Y  OF  MODERN  BANKS  OF  ISSUE. 

market.  The  fact  that  bankers  conducted  the  exchange  of 
money  of  all  countries  naturally  made  them  authorities  in 
monetary  matters.  At  Athens  they  kept  accounts  for  their 
clients,  which  they  were  compelled  to  produce  upon  requisi- 
tion, and  their  accuracy  and  technical  knowledge  led  to  their 
frequent  employment  for  verifying  the  accounts  of  the  city. 
JDhe  Greeks  taught  banking  to  Rome,  and  the  first  names 
for  bankers  there  were  of  Greek  origin.  The  banking  busi- 
ness at  Rome  was  at  first  largely  in  the  hands  of  foreigners 
and  freedmen,  but  certain  branches  of  finance  were  in  the 
hands  of  native  Romans.  It  was  the  usurious  rates  of  inter- 
est exacted  by  the  patricians  in  their  business  relations  with 
the  plebeians,  rather  than  any  acts  of  regular  bankers,  which 
led  to  the  secession  of  the  plebs  to  the  Sacred  Mountain  in 
494  and  to  the  Janiculum  in  278  B.C.1  The  regular  bankers, 
the  argentarii,  were  charged  with  the  organization  of  the 
coinage  by  Marius  Gratidianus  in  the  first  century  B.C., 
and  the  work  was  so  well  done  that  statues  were  raised  to 
the  praetor  who  had  taken  the  initiative  in  the  reform.  Sylla 
overturned  the  statues  and  put  in  circulation  the  filled  money 
of  base  metal  which  was  one  of  the  devices  of  early  times.2 
The  booths  of  the  bankers  in  the  Forum  were  so  conspicuous 
that  when,  in  309  B.C.,  the  bucklers  of  the  Samnites  were 
brought  home  by  the  victorious  Roman  armies,  they  were 
ordered  to  be  displayed  with  their  incrustations  of  gold  and 
silver  above  these  booths  in  order  that  the  people  might  view 
their  splendor.3  In  spite  of  these  honors,  however,  it  was 
not  a  source  of  pride  in  Roman  patrician  society  to  be  de- 
scended from  the  argentarii.  Marc  Antony  made  it  a  subject 
of  derision  that  Augustus  counted  an  argentarius  among  his 
paternal  ancestors  and  that  even  on  his  mother's  side  an 
argentarius  was  his  grandfather.4 

The  concentration  at  Rome  of  the  control  of  the  politics 
and  business  of  the  world  gradually  extended  the  scope  of 

1  Cruchon,  40. 

2  Deloume,  Les  Manieurs  d?  Argent  &  Rome,  156. 

3  Cruchon,  43. 

4  Ibid.,  54. 


THE  BEGINNINGS  OF  BANKING.  5 

Roman  banking,  subdivided  the  business,  and  resulted  in 
the  creation  of  a  complete  body  of  jurisprudence,  which  was 
embodied  in  the  Institutes  of  Justinian.  The  argentariivtzrz 
first  money-changers,  then  receivers  of  deposits,  then  lenders 
at  interest  both  of  their  own  money  and  that  entrusted  to 
them,  and  purchasers  of  bills  of  exchange.  Deposits  were 
utilized  as  the  basis  of  transfers  by  paper  credit,  and  loans 
were  made  by  these  instruments  without  the  direct  with- 
drawal of  cash  from  the  hands  of  the  bankers.  The  first 
mention  of  the  argentarii  is  in  lyivy,  about  350  B.C.,  but  the 
later  Roman  plays  are  full  of  references  to  their  methods. 
Prescribere  or  rescribere  was  to  give  a  check  on  one's  account 
or  transfer  credit  from  one  account  to  another.  Thus 
Demipho  says,  in  the  Phormio  of  Terence,  "  But,  Phormio, 
pra}'  go  over  to  the  Korum  and  order  that  money  be  put  to 
my  account. ' ' 1  These  transfer  orders  lacked  the  character 
of  modern  checks  in  not  being  transferable  to  order,  but  the 
principle  of  compensation,  by  setting  off  one  debt  against 
another  between  the  same  persons,  was  generally  recognized. 
^  The  publicans  or  tax-farmers  were  the  strongest  organized 
financial  body  of  antiquity.  They  not  only  farmed  the  taxes, 
but  undertook  to  provide  transportation  and  equipment  for 
the  armies  and  the  means  for  great  public  works,2  Some  of 
the  first  publicans  were  men  who  combined  the  business  of 
private  trade  with  usury  and  money-changing  and  followed 
it  in  the  wake  of  the  Roman  armies  in  their  victorious  pro- 
gress over  Northern  Europe.  Their  exactions,  supported  by 
Roman  power,  made  them  very  unpopular,  and  one  of  the 
notable  incidents  of  the  Gallic  insurrection  in  Caesar's  time 
was  the  massacre  of  these  merchants  or  negotiatores  at 
Genabum.3  The  Italian  merchants  were  also  singled  out, 
along  with  the  publicans  and  proconsuls,  as  the  special  ob- 
jects of  the  fury  of  the  people  of  Poutus  under  Mithridates, 

,  l  Sedtransisodes  ad  forum,  atque  illud  mihi  argentum  rursumjube 
rescribi,  Phormio.— This  is  the  rendering  of  Prof.  MacLeod,  Theory 
and  Practice  of  Hanking,  I.,  162. 

2  Deloume,  94. 

3  Caesar,  De  Bella  Gallico,  VII.,  iii. 


6  HISTOR  Y  OF  MODERN  BANKS  OF  ISSUE. 

when  fifty  thousand  Romans  were  massacred.  The  publicans 
formed  powerful  associations  and  held  a  position  in  Roman 
society  similar  to  that  held  in  the  pre- Revolutionary  period 
in  France  by  the  financiers.  The  commanders  of  the  Roman 
armies  and  proconsuls  also  engaged  in  a  form  of  banking 
by  loaning  their  capital  at  usurious  rates  in  the  provinces. 
Brutus  placed  his  capital  in  Kypros  at  48  per  cent.,  Verres 
placed  his  in  Sicily  at  24  per  cent. ,  while  even  Cato  watched 
carefully  over  his  investments,  and  Pompey  loaned  hundreds 
of  millions  of  sesterces  to  the  kings  and  cities  of  Greece  and 
Asia.1 

It  is  the  opinion  of  Jannet  that  the  organization  of  the 
greater  commerce  and  of  banking  as  it  existed  in  the  Roman 
Empire  survived  the  invasions  of  the  barbarians  and  per- 
sisted during  the  first  part  of  the  Middle  Ages.2  But  lack  of 
security  for  property  in  Western  Europe,  and  the  neglect  of 
the  highways  of  commerce,  gradually  drove  both  commerce 
and  credit  within  narrower  limits  and  led  to  the  withdrawal 
of  metallic  money  for  hoarding  from  its  legitimate  use  in 
circulation.  The  revival  of  banking  in  the  later  Middle 
Ages  came  through  the  money-changers.  The  growth  of 
commerce  and  the  accumulation  of  capital  as  early  as  the 
eleventh  century  began  to  draw  the  precious  metals  from 
their  hiding-places  and  led  each  seigneur  to  coin  his  own 
money.  The  diversity  of  weights  and  the  varying  market 
ratio  between  gold  and  silver  made  the  function  of  the  ex- 
changer an  important  one,  and  the  old  cathedral  windows 
at  Bourges,  Le  Mans,  and  elsewhere  still  portray  his  booths, 
behind  which  he  is  represented  with  a  balance  weighing  the 
coins  piled  at  his  feet  or  drawing  from  a  sack  those  which 
he  proposes  to  give  in  exchange.3  The  edicts  of  Leo  the 
Wise,  the  Byzantine  Emperor  of  Constantinople,  contained 
a  series  of  provisions  governing  the  money-changers.  They 
were  constituted  into  a  corporation,  into  which  admission 


1  Deloume,  146. 

*  Le  Credit  Populaire  et  les  Banques  en  Italie,  7,  n. 

8  Cons,  Precis  d'Histoire  du  Commerce,  I.,  196. 


THE  BEGINNINGS  OF  BANKING.  J 

could  be  obtained  only  upon  the  testimony  of  reputable  citi- 
zens that  the  candidate  would  not  debase  or  counterfeit  the 
coins  and  that  he  would  be  in  the  market-place  at  proper 
times  by  himself  or  a  substitute  for  the  purpose  of  meeting 
his  obligations. 

Similar  money-changers  existed  in  the  Arabian  cities.    In 

faly,  when  Venice,  Florence,  Naples,  Genoa,  and  Pisa  be- 
ime  great  commercial  centres,  the  Lombards  became  the 

>ankers  and  waged  a  bitter  rivalry  with  the  Jews.  The 
Italian  bankers  were  useful  to  the  church,  in  transmitting  to 
Rome  contributions  collected  in  Germany,  France,  and  Eng- 
land, and  in  several  countries  were  given  special  protection 
as  the  representatives  of  the  Pope.  General  regulations  of 
the  exchange  and  banking  business  appear  early  in  the 
Italian  statutes.  The  exchangers  of  Lucca  in  mi  were  re- 
quired to  take  an  oath  not  to  steal,  commit  fraud,  or  falsify. 
Those  engaged  in  the  business  were  known  in  Italy  as 
campsores,  or  dealers  in  foreign  money.  The  chiefs  of  the 
Lombard  League  obtained  from  Frederic  Barbarossa  pledges 
that  the  customs  connected  with  the  tables  of  the  exchangers 
should  be  respected.  In  the  organization  of  industry  at  Flor- 
ence in  1266  the  "art  of  exchange"  was  one  of  the  seven 
higher  arts,  constituting  one  of  the  bourgeois  corporations 
and  ranking  above  the  fourteen  made  up  of  laborers. '  Even 
before  this  date  the  art  of  exchange  had  been  recognized  in 
1204  in  a  treaty  concluded  between  Florence  and  Sienna. 

The  Jewish  and  Italian  bankers  spread  their  connections 
throughout  Western  Europe,  and  the  Lombards  shared  with 
the  Jews  the  unpopularity  of  their  profession.  The  in- 
habitants of  Asti  in  Lombardy  pushed  the  trade  in  money 
beyond  the  Alps  in  1226.  Louis  IX.  in  1256  ordered  150 
Asti  money-changers  to  be  thrown  into  prison  and  the 
money  which  they  had  loaned  in  France  confiscated.  Twelve 
years  later  they  were  banished  by  the  same  monarch  and 
allowed  only  three  months  in  which  to  collect  their  debts.9 


1  Nys,  Recher ches  sur  VHistoire  de  V Economic  Politique>  155. 
9  Roscher,  Principles  of  Political  Economy,  II.,  119. 


8  HISTOR  Y  OF  MODERN  BANKS  OF  ISSUE. 

The  Florentines  and  Venetians,  who  succeeded  the  Lom- 
bards, did  much  to  reorganize  credit  and  formed  great 
houses  with  branches  directed  by  the  co-partners.  The 
Medici  in  the  fifteenth  century  had  not  less  than  sixteen 
branch  houses  in  the  principal  commercial  cities.1  When 
Holland  became  a  centre  of  capital  and  enterprise,  Amster- 
dam superseded  Antwerp  in  commercial  influence,  and  the 
available  capital  of  the  world  was  attracted  there  by  the  ex- 
cellent organization  of  the  Bank  of  Amsterdam.  The  Jewish 
colony  included  Jews  from  Portugal,  Spain,  Italy,  and  Ger- 
many. At  Hamburg  the  Jewish  community,  formed  from 
Portuguese  refugees,  was  credited  with  a  considerable  share 
in  the  creation  of  the  public  bank.3 

The  word  '  *  bank  ' '  is  derived  from  the  public  loans  made 
y  the  Italian  cities  rather  than  to  the  business  of  banking 
understood  in  later  times.  The  usual  Italian  name  of 
a  public  loan  was  monte,  signifying  a  joint-stock  fund.  The 
Germans  were  influential  in  Italy  during  the  Middle  Ages, 
especially  about  the  time  when  a  forced  loan  of  one  per  cent, 
was  levied  by  the  city  of  Venice  in  1171  upon  the  property 
of  all  citizens.  Their  name  for  a  joint-stock  fund  was  banck, 
meaning  a  heap  or  mound,  which  the  Italians  converted 
into  banco  and  employed  for  an  accumulation  of  either  stock 
or  money.  The  definition  of  a  bank  given  in  an  Italian 
dictionary  in  1659  was  "  Monte,  a  standing  Bank,  or  Mount, 
of  money,  as  they  have  in  divers  cities  in  Italy."  A  more 
recent  writer,  Cibrario,  says:  "Regarding  the  Theory  of 
Credit,  which  I  have  said  was  invented  by  the  Italian  cities, 
it  is  known  that  the  first  Bank,  or  public  debt  (il  Prio  Banco 
o  Debito  Pubblico) ,  was  erected  in  Venice  in  1 1 7 1 . "  '  The  word 
was  adopted  into  English,  meaning  indifferently  public  loans 

1  Jannet,  Le  Credit  Populaire  et  les  Banques  en  Italie,  6. 

2  Jannet,  Le  Capital  au  XIXe  Siecle,  434. 

3  MacLeod,  Theory  of  Credit,  II. ,  578.     Professor  MacLeod  insists 
that  the  common  derivation  of  the  word  "bank"  from  the  counter 
upon    which   the   money-changers    kept    their    money,    is   without 
foundation.     He  says  :  "The  Italian  money-changers,  as  such,  were 
never  called  Banchieriin  the  Middle  Ages." 


THE  BEGINNINGS  OF  BANKING.  g 

or  stocks  of  money.  Betibrigge,  in  1646,  speaks  of  the 
"  three  Bankes"  at  Venice,  meaning  the  three  public  loans 
or  Monti.  The  issue  of  paper  money  directly  by  the  state 
was  spoken  of  as  "raising  a  Banke  "  in  colonial  days  in 
Massachusetts,  the  word  "bank"  standing  for  the  money 
rather  than  the  institution  which  put  it  in  circulation.1 

The  banks  of  Venice  have  attracted  wide  attention  because 
of  the  long-preserved  legend,  that  a  public  bank  issuing 
negotiable  securities  used  as  money  was  created  there  in 
1171.  This  legend  has  been  proved  unfounded  by  recent 
investigations  of  L,attes  and  Ferrara.2  Banking  in  Venice 
was  entirely  in  private  hands  during  the  early  centuries  and 
was  a  subject  of  legal  regulation  from  time  to  time  between 
1270  and  1584.  It  was  not  until  the  latter  year  that  an 
attempt  was  made  to  create  a  public  bank.  Private  banking 
acquired  a  wide  scope  as  the  gradual  outgrowth  of  the  busi- 
ness of  the  campsores.  The  latter  were  required  as  early  as 
1270  to  give  security  to  the  government  as  the  condition  of 
carrying  on  their  traffic.  Tommaso  Contarini,  in  a  speech 
delivered  in  the  Senate  in  1584  in  favor  of  establishing  a 
public  bank,  declared  that  there  had  been  one  hundred  and 
three  banks,  of  which  ninety-six  had  come  to  a  bad  end  and 
only  seven  had  succeeded.  Yet,  says  Professor  Dunbar, 
"  notwithstanding  a  train  of  disasters  nearly  two  centuries 
and  a  half  long,  the  service  rendered  by  the  banks  to  com- 
merce had  been  such,  on  the  whole,  as  to  lead  Contarini  to 


Weeden,  Economic  and  Social  History  of  New  England,  318. 
2  The  results  of  their  inquiries  were  printed  by  Professor  I/attes  in 
La  Liberia  delle  Banche  a  Venezia  dal  Secolo  XIII.  al  XVII.,  pub- 
lished at  Milan  in  1869,  and  by  Professor  Ferrara  in  the  Nuova 
Antologia  for  January  and  February,  1871.  They  have  been  care- 
fully analyzed  and  summed  up  by  Professor  Dunbar,  Economic 
Essays,  143-167.  The  true  status  of  the  Venetian  banks  seems  to 
have  been  known  to  Blanqui,  for  he  says  that  "what  we  know  of 
the  Bank  of  Venice  and  that  of  Genoa  does  not  permit  a  doubt  that 
these  banks  were  nothing  else  than  great  tax-farming  enterprises 
(rrandes  regies  de  perception)  for  the  objects  of  the  Government." — 
Histoire  de  /'  Economie  Politique,  II.,  41. 


I O  HIS  TOR  Y  OF  MODERN  BANKS  OF  ISSUE. 

argue  that  to  preserve  the  trade  of  the  city  without  banking 
was  not  only  difficult,  but  impossible. ' ' 

These  early  banks  first  did  business  with  their  own  money 
and  then  with  deposits,  like  the  London  goldsmiths  at  a 
later  date.  The  use  of  the  deposits  was  not  at  first  intended 
to  economize  cash,  but  simply  to  avoid  its  frequent  handling. 
The  transfer  of  credits  upon  the  books  of  the  bank  trans- 
ferred the  title  to  cash  in  the  custody  of  the  bank,  and,  so 
far  as  this  rule  had  been  violated  by  grants  of  credit  to  per- 
sons who  had  not  deposited  cash,  it  was  treated  by  Contarini 
as  a  grave  abuse.  He  saw  in  the  banking  system  only  a 
method  of  transfer  by  book  accounts,  by  which  "buyer  and 
seller  are  satisfied  in  a  moment,  while  the  pen  moves  over 
the  page,  whereas  a  day  would  not  be  enough  to  complete 
the  contract  for  a  great  mass  of  merchandise  by  counting 
a  great  number  of  coins."  *  Notwithstanding  the  attempt 
to  keep  banking  within  these  limits,  the  bankers  employed 
the  money  entrusted  to  them  in  more  or  less  speculative 
ways,  and  an  act  of  1374  forbade  dealings  in  certain  specified 
commodities  or  the  opening  of  credits  for  such  dealings. 
The  banks  came  by  degrees  to  make  advances  to  the  state 
and  to  grant  credits  to  merchants  and  traders  without  full 
cash  security.  They  thus  became  substantially  banks  of 
issue.  They  did  not  formally  issue  notes,  but  banking 
credits  came  to  constitute  certificates  of  deposit  which 
circulated  as  currency. 

The  creation  of  the  Bank  of  St.  George  at  Genoa  and  the 
bank  at  Milan  were  due  in  some  degree  to  the  survival  of 
the  Roman  system  of  farming  the  taxes.  A  single  individual 
was  hardly  equipped  with  sufficient  capital  to  carry  on  the 
large  operations  involved,  and  associations  were  formed  for 
dealing  with  the  state  on  the  one  hand  and  the  taxpayer  on 
the  other,  which  became  the  nucleus  of  larger  banking  opera- 
tions. Thus  great  financiers  grew  up,  who  dominated  the 
politics  as  well  as  the  finance  of  European  states  as  soon  as 
centralization  had  reached  a  point  which  called  for  a  paid 


Dun  bar,  Quarterly  Journal  of  Economics,  April,  1892,  VI.,  314. 


THE  BEGINNINGS  OF  BANKING.  1 1 

military  force  and  made  money  the  nerve  of  war.  One  of  the 
great  houses  which  wielded  a  remarkable  influence  in  the 
fifteenth  and  sixteenth  centuries  was  that  of  the  Fuggers. 
The  founder,  Hans  Fugger,  came  to  Augsbourg  from  a 
country  village  in  1367  and  died  in  1409,  leaving  a  fortune 
of  3000  florins.  It  was  Jacob  Fugger,  his  grandson,  who 
gave  the  house  a  national  character  and  international  power. 
The  business  of  trade  in  silks  and  other  stuffs  was  at  first 
mingled  with  mining  and  banking  operations.  It  was  in 
1487  that  Jacob  Fugger  concluded  an  arrangement  with 
Duke  Sigismund,  by  which  he  acquired  the  rich  silver  mines 
of  the  Tyrol  as  the  guarantee  of  a  loan.  Maximilian,  the 
successor  of  Sigismund,  obtained  large  loans  from  the  Fug- 
gers, they  had  important  transactions  with  Pope  Julius  II., 
and  their  operations  were  extended  to  Antwerp  and  India. 

The  election  of  the  Roman  Emperor  after  the  death  of 
Maximilian  afforded  the  opportunity  to  dictate  world  politic^. 
Francis  I.  of  France  had  already  announced  that  he  would 
obtain  the  Empire  at  any  cost,  and  it  was  necessary  for 
Charles  V.  to  appeal  to  the  Fuggers  for  money  to  influence 
the  electors.  The  aggregate  cost  of  the  election  of  Charles 
was  stated  at  850,000  florins,  of  which  the  Fuggers  provided 
543, ooo. l  Charles  V.  endeavored  to  have  the  debt  assumed 
by  Spain  and  had  such  trouble  in  raising  funds  that  Francis 
I.  was  able  to  win  from  him  his  German  mercenaries.  The 
Fuggers  had  great  difficulty  in  recovering  their  advances  to 
the  Spanish  king  and  in  1524  assumed  the  farming  of  a  large 
part  of  the  Spanish  land  taxes  and  the  mines.  Jacob  Fugger 
was  at  this  time  the  most  potent  financier  in  the  world,  with 
establishments  in  Poland,  Hungary,  Spain,  Antwerp,  and 
Naples.  After  his  day,  the  prestige  of  the  house  gradually 
declined.  As  late  as  1560  a  "  Fugger  bill  of  exchange  "  was 
synonymous  with  cash,  but  in  1562  it  was  necessary  to  bor- 
row to  meet  obligations  and  the  assets  of  the  house  only 
slightly  exceeded  its  liabilities.  The  King  of  Spain  in 


1  DfLpoque  des  Fugger^  in  Annales  de  r  Institutes  Sciences  So- 
dales,  III.,  108. 


1 2  HISTOR  Y  OF  MODERN  BANKS  OF  ISSUE. 

1631  accorded  the  Fuggers  an  extension  for  paying  their 
debts  and  their  affairs  thereafter  consisted  of  a  process  of 
liquidation. 

The  business  of  banking  was  only  a  branch  of  the  great 
affairs  of  these  finance  houses  of  the  sixteenth  and  seven- 
teenth centuries.  The  Fuggers  endeavored  to  acquire  large 
territories  in  Chile,  and  the  Welsers  of  Augsbourg  under 
Charles  V.  obtained  an  entire  province  of  Venezuela.  The 
bankers  of  Genoa  advanced  to  the  kings  of  Spain  the 
amounts  required  for  their  destructive  wars  in  Italy,  France, 
and  the  Netherlands,  upon  the  guarantee  of  the  product  of 
the  mines  of  the  new  world. '  The  Hochstetters  of  Amster- 
dam were  among  the  greatest  of  the  Dutch  houses  and  it  was 
declared  by  a  chronicler  that  "princes,  counts,  nobles, 
tradesmen,  peasants,  valets,  and  servants  have  placed  with 
Ambrose  Hochstetter  all  their  money,  for  which  he  pays  five 
per  cent."  The  Hochstetters  endeavored  between  1511  and 
1517  to  "corner"  the  tin  market.  They  bought  up  the 
entire  visible  supply,  but  new  mines  were  opened  in  Spain 
and  Hungary  which  they  were  unable  to  control,  and  they 
lost  a  third  of  their  investment.  The  house  became  involved 
in  further  difficulties  within  another  generation  and  accused 
the  Greshams  of  England  of  overthrowing  their  credit.3 

Banking  in  France  before  the  experiments  of  John  Law 
was  largely  in  the  hands  of  the  farmers-general  and  "  finan- 
ciers." The  farmers-general  have  often  been  confounded 
with  the  other  class,  but  they  were  for  the  most  part  respect- 
able officials  upon  fixed  salaries,  who  were  connected  with 
the  financiers  only  through  dealings  with  them  and  the 
efforts  of  the  financiers  to  obtain  admission  to  the  official 
body  as  a  badge  of  respectability.3  The  Ferme  Gentrale  was 
given  a  permanent  organization  only  in  1680.  The  finan- 
ciers were  the  adventurers  and  kings  of  finance,  but  lacked 
social  prestige  and  were  the  subjects  of  many  jibes  for  efforts 


1  Nys,  164. 

2  Annales  de  I ' ' Inslitut  des  Sciences  Sotiales,  III.,  365. 
3 Gomel,  Causes  Financieres  de  la  Revolution,  I.,  317. 


THE  BEGINNINGS  OF  BANKING.  13 

— often  successful — to  ally  themselves  with  noble  families. 
Before  the  Revolution  many  of  the  great  estates  had  passed 
into  their  hands.1  They  were  known  under  the  specific 
names  si  partisans  and  traitants,  the  first  name  referring 
to  the  fact  that  they  advanced  money  in  payment  for  the 
creation  of  new  offices,  thereby  ' '  taking  a  part ' '  (un 
parti),  according  to  the  language  of  the  time.  The  name  of 
traitants  was  derived  from  their  function  as  negotiators  of 
financial  paper.  The  financiers  made  advances  to  the 
farmers-general  in  anticipation  of  the  collection  of  the  taxes. 
The  paper  given  in  these  transactions,  and  other  evidences  of 
the  public  debt,  were  the  subject  of  quotation  and  speculation 
early  in  the  seventeenth  century.  A  profession  of  dealers  in 
exchange,  banking,  and  merchandise  had  been  created  by 
Charles  IX.  in  1572,  and  a  distinction  between  the  bankers 
and  the  merchants  was  made  by  a  decree  of  the  Council  in 
1638. 2  The  Caisse  des  Emprunts,  a  sort  of  bank  created  by 
the  farmers-general  to  meet  demands  for  advances  by  the 
Treasury,  was  established  as  early  as  1674  and  received  the 
deposits  of  the  public  at  sight  at  an  interest  which  occasion- 
ally reached  ten  per  cent.  This  bank  was  seized  by  the 
Controller  General,  Desmarets,  in  1715,  and  a  part  of  the 
money  sequestrated  was  made  good  by  the  issue  of  securities. 
Among  the  most  famous  of  the  financiers  was  Samuel 
Bernard,  who  accumulated  a  fortune  under  I^ouis  XIV. 
estimated  at  60,000,000  livres.  The  Paris  brothers  were  also 
prominent  at  the  court  of  "  the  Grand  Monarch,"  and  the 
most  celebrated,  Paris-Duvernay,  was  charged  in  1721  with 
the  readjustment  of  the  finances  after  the  collapse  of  the 
plans  of  L,aw.3 

Bach  phase  of  banking  was  an  almost  necessary  evolution 
of  the  conditions  of  the  time.  The  money-changer  followed 
the  merchant  in  his  voyages  over  the  world,  when  merchan- 
dise and  metallic  money  constituted  the  only  instruments  of 


1  Taine,  Ancien  Regime,  51,  note. 

2  Jan  net,  Le  Capital  au  XIXe  Siecle,  449. 

3  Courtois,  Histoire  des  Banques  en  France,  64. 


14  HISTOR  Y  OF  MODERN  BANKS  OF  ISSUE. 

exchange.  The  creation  of  uniform  monetary  systems  and 
wide  areas  of  trade  under  a  single  political  sovereignty  made 
his  profession  less  important ;  but  it  was  principally  the  or- 
ganization of  credit,  permitting  exchanges  without  metallic 
money,  which  reduced  the  money-changer  to  an  essentially 
subordinate  place  l  and  gave  birth  to  modern  banking.  The 
bill  of  exchange  was  one  of  the  earliest  forms  of  credit,  and 
its  use  was  extended  beyond  its  present  purposes  in  order  to 
meet  the  necessities  of  the  Middle  Ages.  To  the  Jews  were 
ascribed  the  invention  and  perfection  of  the  bill  of  exchange, 
as  a  means  of  evading  the  confiscation  of  their  property  by  its 
prompt  and  secret  transfer. 

l    Two  circumstances  contributed  to  throw  into  the  hands  of 
/  the  Jews  the  trade  in  money  in  the  Middle  Ages.     One  was 
I  the  fact  that  they  were  shut  out  from  all  other  trades ;  the 
'  other  was  the  attitude  of  the  church  towards  loans  at  inter- 
\  est.     The  acquisition  of  real  property  was  prohibited  to  the 
Jews  in   nearly   every  European   state.     The  guilds  were 
closed  to  them  and  they  were  forbidden  to  exercise  trades 
and  manufactures.2     The  exclusion  from  real  property  was 
not  a  hardship,  if  they  were  to  be  subject  to  constant  confis- 
cations,  since  money   and  its  paper  representatives   were 
almost  the  only  forms  of  property  which  could  be  readily 
transported   and   concealed.     "The  richest  traders,"  says 
Montesquieu,  **  having  only  invisible  goods,  they  were  able 
to  be  sent  every  where  and  left  no  trace  behind."  3 

The  denial  of  the  legitimacy  of  interest  was  a  natural 
evolution  from  conditions  of  the  time.  The  rigors  of  the 
church  were  directed  primarily  against  loans  for  consump- 
tion to  persons  in  need.  When  saved  capital  was  the  ex- 
ception, and  opportunities  for  organized  industry  were  rare, 
loans  for  productive  purposes  were  the  exception.4  When 

1  The  goldsmiths  assumed  the  functions  of  the  money-changers,  as 
the  latter  lost  their  importance,  and  in  1514  the  changers  disappeared 
from  the  list  of  the  six  merchant  bodies. — Cons,  I.,  196. 

2  Nys,  136. 

3  De  r Esprit  des  Lois,  livre  XXI.,  ch.  xx. 

4  Prof.  Jannet  points  out  that  the  prejudice  against  loans  at  interest 


I 


THE  BEGINNINGS  OF  BANKING.  1 5 

the  time  came  for  escaping  the  restrictions  of  the  canonical 
laws,  several  ways  were  found  of  doing  so.  Already,  as 
early  as  the  thirteenth  century,  Albert  le  Grand  conceded 
that  "  if  usury  is  against  the  perfection  of  Christian  law,  it  is 
at  least  not  contrary  to  civic  interests. ' '  Even  St.  Thomas 
admitted  the  loss  resulting  (damnum  emergens]  to  the  lender 
who  was  kept  out  of  his  money,  and  the  interval  of  time  and 
the  value  lost  (quantum  ejus  intererat)  gave  birth  to  the 
word  interest  as  a  substitute  for  usury  (usura).1 

Transportation  of  money  from  one  place  to  another  in- 
volved a  cost  which  justified  a  charge.  This  charge  was 
made  sufficient  to  cover  a  reasonable  interest  for  the  use  of 
money.  Hence  arose  the  provisions  of  many  of  the  Conti- 
nental codes  of  commerce,  that  the  bill  of  exchange  should 
be  payable  in  a  different  place  from  that  where  it  was  drawn. 
The  bill  of  exchange  was  converted  into  a  form  of  direct  loan 
called  ' '  dry  exchange, ' '  by  which  the  borrower  drew  a  bill 
on  a  fictitious  person  in  some  foreign  town  at  the  current 
rate  of  exchange,  which  he  delivered  to  the  lender.  At 
maturity  the  bill  was  returned  protested  and  the  borrower 
charged  with  re-exchange  and  incidental  expenses,  amount- 
ing perhaps  to  20  or  30  per  cent.,  the  bill  never  having  been 
out  of  the  country.1 

I  A  further  step  was  taken  towards  modern  banking  meth- 
ods when  the  Italian  bankers  received  cash  under  the  name 
of  deposits,  but  in  reality  to  be  made  fruitful  in  the  banking 

was  not  without  its  justification  before  money  came  to  be  borrowed 
for  the  purposes  of  production,  because  the  proceeds  of  the  loan  were 
usually  consumed  instead  of  multiplied,  and  if  loans  at  interest  had 
been  universally  approved  they  would  soon  have  resulted  in  rural 
localities  in  the  practical  enslavement  of  the  peasants  who  were  un- 
able to  pay.  The  distinction  between  loans  for  production  and  for 
consumption  was  early  recognized  by  the  church,  and  the  fifth  Lateran 
Council  (1512-17)  decreed  :  "  Ea  est  propria  usurarum  interpretatio, 
quando  videlicet  ex  usu  rei  quae  non  germinal  nullo  labore,  nullo 
sumptu,  nullove  periculo  lucrum  foetusque  conquiri  studetur." — Le 
Capital ',  la  Speculation,  et  la  Finance,  81. 

1  Rambaud,  Histoire  des  Doctrines  fcconomiques,  40-42. 

2Cossa,  Introduction  to  the  Study  of  Political  Economy,  154. 


1 6  HISTOR  Y  OF  MODERN  BANKS  OF  ISSUE 

and  commercial  operations  in  which  they  were  engaged. 
These  funds  were  represented  by  mandates,  which  differed 
little  from  the  checks  adopted  many  centuries  later.  The 
records  of  bankers  regarding  transfers  of  money  had  a  recog- 
nized status  in  courts  of  justice,  derived  in  some  measure 
from  the  survival  of  their  public  character  under  the  Roman 
Empire. 

Thus  gradually  emerged  from  the  need  for  them  all  the 
attributes  of  modern  banking.  The  individual  money- 
changer, the  Jewish  lender,  the  Lombard  banker,  gradually 
gave  way,  as  centralization  advanced  in  economic  and 
political  life,  to  public  banks  doing  business  under  official 
authority.  Along  with  this  evolution  went  the  develop- 
ment of  methods  suited  to  the  new  conditions.  The  com- 
plexity of  coinage  systems  was  remedied  by  the  creation  of 
' '  bank  money  ' '  of  uniform  value  by  such  institutions  as  the 
banks  of  Venice,  Amsterdam,  and  Hamburg.  The  bill  of 
exchange  became  a  means  for  making  productive  loans. 
Deposits  were  accepted  to  be  loaned  for  profit,  and  in  these 
profits  the  depositor  was  permitted  to  share.  The  character 
of  the  loan  changed  from  a  specific  deposit,  transferable  only 
by  the  owner,  to  a  loan  from  the  owner  to  the  bank,  for 
which  he  received  a  direct  interest.  The  resources  of  modern 
savings,  attracted  into  the  keeping  of  the  banks,  became 
available  for  loans  to  the  producing  and  trading  elements  in 
the  form  of  discounts.  Modern  credit  thus  gradually  re- 
ceived its  organization  and  needed  only  the  creation  of  the 
bank  note  and  the  extension  of  the  mechanism  of  clearings 
and  co-operation  among  the  banks  to  stand  forth  fully 
equipped  for  providing  the  motive  power  of  commerce. 


CHAPTER  II. 

ANCIENT  AND  MODERN   BANKING  IN  ITALY. 

Italy  the  Mother  of  Modern  Banking  in  the  West  —  Conditions  before 
the  Unification  of  the  Kingdom  —  Specie  Suspension  and  the  Era 
of  Depreciated  Paper  during  the  Struggles  for  Lombardy  and 
Venetia  —  Rise  of  the  Bank  of  Italy—  The  Bank  Scandals  of  1893  — 
Flight  of  Subsidiary  Silver  to  Other  Countries  —  Recovery  of 
National  Credit  in  the  Twentieth  Century. 


^^TAlyY  is  the  mother  of  modern  banking  in  the  West,  not 
only  as  heir  of  the  Roman  bankers  of  antiquity,  but  as 
the  first  country  to  develop  the  mechanism  of  modern 
credit  under  the  light  of  the  Renaissance.  Of  the  Bank  of 
Venice  and  of  other  early  Italian  banks,  the  story  has  already 
been  briefly  told.  The  disorders  which  came  on  the  heels 
of  the  French  Revolution,  wiping  out  the  boundaries  of  states 
and  destroying  the  freedom  of  the  Italian  cities,  put  an  end 
also  to  most  of  the  ancient  banks.  The  only  one  which  sur- 
vived was  a  land  and  mortgage  bank  called  Monte  dei  Paschi, 
at  Sienna,  which  was  believed  to  date  back  to  the  seventeenth 
century.  The  first  effort  to  found  a  modern  bank  was  made 
at  Genoa  upon  the  foundations  of  the  old  Bank  of  St.  George, 
The  effort  was  not  successful,  and,  in  the  opinion  of  M. 
Courcelle-Seneuil,  this  is  not  to  be  regretted,  "  for  the  Bank 
of  St.  George  was  adapted  to  customs  and  commercial  usages 
which  have  ceased  to  exist."  The  next  attempt  to  establish 
a  banking  system  in  Piedmont  was  made  by  letters  patent 
of  King  Charles  Albert,  under  date  of  March  16,  1844.  The 
new  bank  was  to  be  known  as  the  Bank  of  Genoa,  to  have  a 


1 8  HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

capital  of  4,000,000  lires  ($800,000),  and  to  be  under  the 
supervision  of  a  royal  commissioner  and  sub-commissioner. 
The  bank  received  a  subvention  of  4,000,000  lires  from  the 
government  during  1846  and  the  following  years,  upon 
which  it  paid  interest  at  two  per  cent.  A  bank  was  founded 
at  Turin  on  October  16,  1847,  with  a  capital  of  4,000,000 
lires,  but  the  political  and  economic  crisis  of  1848  checked 
its  development.  A  royal  ordinance  of  December  14,  1849, 
authorized  it  to  unite  with  the  older  bank  under  the  denom- 
ination of  the  National  Bank  of  Sardinia,  with  head  offices  at 
both  Genoa  and  Turin.  The  duration  of  the  new  establish- 
ment was  fixed  at  thirty  years,  beginning  on  January  i, 
1850,  and  its  capital  at  8,000,000  lires,  which  was  afterwards 
increased  to  32,000,000  lires  ($6,200,000). 

The  government  in  1848  resolved  upon  a  loan  of  20,000,000 
lires,  which  the  Bank  of  Genoa  was  required  to  furnish  at 
two  per  cent. ,  upon  the  pledge  of  the  goods  of  the  Order  of 
Saints  Maurice  and  L,azarus.  Forced  legal  tender  character 
was  given  to  the  bank-notes  and  an  increase  in  issues  per- 
mitted of  20,000,000  lires.  The  smallest  notes  were  reduced 
from  250  lires  ($50)  to  100  lires  ($20)  with  the  condition  that 
the  notes  of  100  lires  should  not  be  issued  to  the  amount  of 
more  than  one-fifth  of  the  total  circulation.  The  loan  was 
reimbursed  to  the  bank  and  specie  payments  were  resumed 
at  the  end  of  1849.'  The  bank  from  that  time  followed  the 
fortunes  of  the  Royal  House  of  Sardinia,  and  extended  its 
branches  and  operations  with  the  success  of  the  Sardinian 
arms  and  the  consolidation  of  the  Italian  States.  It  was 
necessary  in  1856  to  authorize  the  bank  to  exceed  the 
maximum  note  circulation  allowed  by  its  statutes,  which  was 
three  times  the  cash  reserve.  The  bills  of  the  bank  were 
again  made  legal  tender,  with  suspension  of  cash  payments 
on  April  27,  1859,  on  the  occasion  of  the  war  with  Austria, 
and  the  bank  was  authorized  to  issue  6,000,000  lires  in  notes 
of  twenty  lires  ($4)  and  to  open  a  credit  for  the  government 
to  the  amount  of  30,000,000  lires  at  two  per  cent.  The  bank 


Courcelle-Seneuil,  354. 


ANCIENT  AND  MODERN  BANKING  IN  ITALY.      1 9 

was  prudently  conducted,  the  government  did  not  draw  its 
full  credit,  and  the  notes  fell  but  little  below  par.  Their 
circulation  was  extended  on  June  u,  1859,  to  the  entire 
territory  occupied  by  the  Sardinian  troops. 

The  bank  was  reorganized  at  this  time  as  the  National 
Bank  of  the  Kingdom  of  Italy,  in  pursuance  of  the  plans  of 
King  Victor  Emmanuel  for  the  unification  of  Italy.  Its 
capital  was  increased  to  40,000,000  lires  ($8,000,000)  and 
three  head  offices  of  equal  rank  were  established  at  Turin, 
Genoa,  and  Milan,  the  latter  being  a  new  office  within  the 
territory  added  to  the  new  Kingdom  of  Italy.  The  bank 
resumed  specie  payments  and  opened  a  credit  of  18,000,000 
lires  in  favor  of  the  government.  Branches  were  established 
in  1860  at  Bergama,  Brescia,  Como,  Modena,  and  afterwards 
at  Ancona  and  Perusia.  The  bank  absorbed  the  leading 
banks  of  Bologna  and  Parma  and  established  branches  at 
Ferrara,  at  Forli,  and  at  Ravenna.  The  annexation  of 
Naples  to  the  Kingdom  of  Italy  did  not  result  in  the  de- 
struction of  the  Banks  of  Naples  and  Sicily,  but  the  National 
Bank  was  authorized  to  establish  a  principal  branch  at 
Naples  and  branches  at  Catana,  Messina,  Reggio,  and  other 
places  in  Southern  Italy.  Branches  were  also  authorized  at 
this  time  at  Pavia,  Cremona,  and  Piacentia. 

The  character  of  the  National  Bank  of  the  Kingdom  of 
Italy  was  not  essentially  changed  until  the  Act  of  August 
10,  1893,  but  its  relations  to  the  government  constantly  grew 
closer  and  it  was  compelled  to  accept  forced  legal  tender  for 
its  notes  in  order  to  comply  with  demands  for  advances  to 
the  State.  Suspension  of  specie  payments  was  decreed  at 
the  outbreak  of  the  war  in  1866,  although  the  capital  of  the 
Bank  had  been  increased  by  the  decree  of  June  29,  1865,  to 
100,000,000  lires  ($20,000,000).  The  provision  for  the  sus- 
pension of  specie  payments,  with  legal  tender  quality  for  the 
bank-notes,  applied  only  to  the  National  Bank,  but  the  latter 
was  required  to  furnish  circulating  notes  without  charge  to 
other  banks  of  circulation.  The  depreciation  of  the  bank-notes 
drove  the  subsidiary  coins  out  of  circulation,  and  many  small 
banks  of  deposit,  commercial  houses,  and  even  retailers,  issued 


20  HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

certificates  of  one  lire  and  50  centimes  to  take  their  place. 
The  government  in  1868  sought  to  drive  these  notes  out  of 
circulation  by  authorizing  the  issue  of  notes  for  one  lire  by 
the  regular  banks  of  circulation,  which  were  made  legal 
tender  for  a  limited  sum  throughout  the  Kingdom.  The 
bank  made  handsome  profits,  as  usual  when  specie  payments 
are  suspended,  made  large  advances  to  the  government  and 
again  increased  its  capital  to  200,000,000  lires  under  author- 
ity of  a  law  of  April  9,  1872.' 

The  policy  of  the  Italian  government  to  introduce  unity 
into  every  branch  of  Italian  affairs  was  pursued  cautiously 
in  the  case  of  the  bank-note  circulation  and  without  the 
hasty  abrogation  of  the  rights  of  the  banks.  No  new  bank 
could  be  constituted  without  the  authority  of  a  special  law, 
but  five  banks  of  circulation  conducted  business  without 
interference  by  the  side  of  the  National  Bank  of  Italy. 
The  Roman  Bank,  founded  in  1851  with  a  privilege  secured 
until  December  31,  1889,  had  a  capital  of  15,000,000  lires 
and  while  Rome  was  independent  of  the  Kingdom  of  Italy  was 
under  the  protection  in  a  measure  of  the  Papal  power.  The 
National  Bank  of  Tuscany  was  established  in  July,  1857, 
with  a  capital  of  30,000,000  lires  and  the  Tuscan  Bank  of 
Credit  was  established  for  thirty  years  in  March,  1860,  with 
a  capital  of  10,000,000  lires,  of  which  only  half  was  paid  in. 
Both  these  banks  were  located  at  Florence.  The  Bank  of 
Naples  was  founded  as  early  as  1794  and  the  capital  was 
contributed  in  part  by  the  State.  It  had  a  head  office  at 
Rome  and  about  a  dozen  branches.  The  Bank  of  Sicily  was 
also  an  old  establishment,  with  its  headquarters  at  Palermo, 
four  principal  offices  in  other  parts  of  Sicily  and  branches  at 
Rome  and  elsewhere  in  Italy.  The  capital  of  the  Bank  of 
Naples  was  originally  32,500,000  lires  and  that  of  the  Bank 
of  Sicily  was  8,000,000  lires.  The  authorized  circulation  of 
these  banks  under  the  law  of  1874  was  450,000,000  lires  for 
the  National  Bank  of  Italy  ;  45,000,000  lires  for  the  Roman 
Bank  ;  63,000,000  lires  for  the  National  Bank  of  Tuscany  ; 


1  Juglar,  Article  "  Banques,"  in  Didionnaire  des  Finances,  I.,  344. 


ANCIENT  AND  MODERN  BANKING  IN  ITALY.      21 

15,000,000  lires  for  the  Tuscan  Bank  of  Credit;  146,250,000 
lires  for  the  Bank  of  Naples,  and  36,000,000  for  the  Bank  of 
Sicily,  making  a  total  of  755,250,000  lires  ($150,000,000).' 

The  necessity  of  maintaining  public  credit,  and  some  com- 
plaints by  the  other  banks  that  they  suffered  by  the  special 
favors  granted  to  the  National  Bank,  led  to  legislation  in 
1874  which  established  the  Consorzio.  This  arrangement 
formed  the  banks  into  a  syndicate  for  the  withdrawal  of  the 
notes  issued  directly  on  behalf  of  the  government  and  the 
substitution  of  a  like  sum  (840,000,000  lires)  in  bank  bills 
of  the  National  Bank,  which  were  made  legal  tender  through- 
out the  Kingdom.  The  notes  issued  by  the  provincial  banks 
on  their  own  account  were  to  be  legal  tender  only  within  the 
province  in  which  the  bank  was  established.  The  govern- 
ment voted  itself  the  authority  to  increase  its  loans  from  the 
associated  banks  to  1,000,000,000  lires  ($200,000,000)  and  to 
demand  a  certain  proportion  of  the  amount  in  gold.  The 
government  pledged  itself  to  deposit  five  per  cent,  securities 
as  the  guarantee  of  the  loan  and  to  pay  a  low  rate  of  inter- 
est. The  advances  actually  made  to  the  government  under 
this  arrangement  reached  940,000,000  lires,  of  which  600,- 
000,000  was  reimbursed  from  the  product  of  a  specie  loan 
authorized  by  the  law  of  April  7,  1881,  and  the  remainder 
was  transformed  into  government  bills.  The  Consorzio 
came  to  an  end  with  the  abolition  of  forced  legal  tender  in 
1884.  The  circulation  of  the  banks  was  slightly  increased 
by  the  law  of  June  30,  1891,  which  admitted  a  maximum 
limit  equal  to  the  mean  circulation  of  1890. 

The  suspension  of  specie  payments,  the  failure  of  the 
Roman  Bank,  and  the  almost  complete  collapse  of  the  bank- 
ing system  of  Italy  came  about  in  the  latter  part  of  1892  and 
the  beginning  of  1893  as  the  result  of  wilful  violations  of 
law  by  the  banks  and  the  guilty  connivance  of  public  offi- 
cials. The  Roman  Bank  was  accused  of  exceeding  its  circu- 
lation at  almost  the  same  moment  that  the  director  of  the 
Roman  branch  of  the  Bank  of  Naples,  Signer  Cucciniello, 

1  Alfred  Neymarck,  Article  "  Banque,"  in  Dictionnaire  d'£conomie 
Politique,  I.,  141-42. 


22  HISTORY  OF  MODERN  BANKS   OF  ISSUE. 

fled  with  his  secretary,  leaving  obligations  of  2,000,000  lires 
($400,000)  and  compelling  the  branch  to  close.  It  was  found 
that  the  excess  of  note  issues  had  been  distributed  among 
the  politicians  by  the  thousands  and  hundreds  of  thousands. 
A  Roman  deputy  had  received  4,000,000  lires ;  a  former 
minister,  2,000,000  lires  ;  a  well-known  financier,  1,500,000; 
a  newly  elected  deputy,  1,000,000  ;  a  former  editor,  150,000  ; 
and  others,  various  sums  from  1,000  to  500,000  lires.1  Some 
of  these  sums  were  put  in  the  form  of  loans  and  advances, 
but  the  security  was  nominal,  many  of  the  loans  were  long 
over-due,  and  Signer  Tanglongo  of  the  bank  management 
declared  that  he  had  been  compelled  to  retain  these  people 
by  the  orders  of  several  ministers  and  of  a  president  of  the 
council. 

An  official  investigation  was  ordered  and  the  report  by 
Senator  Finali  showed  that  three  of  the  banks  had  exceeded 
the  legal  limit  of  their  circulation  and  that  all  had  tied  up 
their  assets  to  an  alarming  extent  in  securities  which  could 
not  be  readily  negotiated.  The  excess  of  circulation  in  the 
case  of  the  Roman  Bank  was  64,543,230  lires  ;  the  Bank  of 
Sicily,  14,917,203  lires;  and  the  Bank  of  Naples,  2,041,501 
lires.  It  was  found  that  the  National  Bank  also  had  issued 
53,700,000  lires  illegally  by  order  of  the  administration. 
The  funds  not  readily  negotiable  at  sight  were  reported  as 
628,620,686  lires,  or  nearly  twice  the  capital  and  reserves  of 
the  banks,  the  Tuscan  Bank  of  Credit  alone  being  in  a  sound 
condition.2  The  loans  upon  mortgages  and  other  securities 
slow  to  realize  were  199,756,000  lires,  and  what  were  called 
the  "  Direct  Employments"  of  the  funds,  in  Treasury  bonds 
and  other  paper  below  par  or  of  doubtful  value,  were  172,- 
343,000  lires.  The  deputies  who  had  paper  over-due  were 
found  to  number  sixteen,  and  the  amount  of  the  paper  was 
5,922,410  lires,  some  of  it  going  back  to  1878.  There  were 
nine  more  deputies  who  had  obtained  renewals  to  the  amount 
of  641,670  lires.  Among  the  latter  was  Premier  Crispi,  with 
loans  of  244,000  lires  which  had  been  renewed  since  1887. 

1  Revue  des  Banques,  -March,  1893,  XII.,  335. 

2  Revue  des  Banques,  May,  1893,  XII.,  378. 


ANCIENT  AND  MODERN  BANKING  IN  ITALY.       2$ 

It  was  stated  that  a  report  of  August  30,  1889,  had  shown  a 
clandestine  circulation  of  9,000,000  lires  by  the  Roman  Bank, 
and  that  it  was  known  to  Signer  Crispi,  then  President  of 
the  Council  of  Ministers,  as  well  as  to  Signer  Giolitti.1 

These  discoveries  were  a  death-blow  to  the  Italian  bank- 
ing system  as  it  then  existed.  The  Roman  Bank  was  com- 
pelled to  liquidate,  and  its  affairs  were  taken  in  charge  by 
the  National  Bank.  The  privilege  of  the  banks  expired  in 
1889  and  1890,  but  had  been  renewed  for  brief  periods  until 
the  close  of  1892.  A  law  was  then  pending,  proposed  by 
Signor  Grimaldi,  which  provided  for  a  renewal  for  six  years, 
and  that  every  bank  should  accept  the  notes  of  the  others. 
But  this  project  went  by  the  board  when  the  rottenness  of 
the  existing  banking  system  was  discovered,  and  the  gov- 
ernment seized  the  opportunity  to  push  a  step  further  the 
policy  of  unity  and  consolidation.  The  National  Bank  of 
the  Kingdom  was  badly  compromised,  and  the  redemption 
of  its  notes  in  specie  was  indefinitely  suspended,  but  it  was 
made  the  basis  of  the  new  institution  founded  by  the  law  of 
August  10,  1893. 

The  new  law  provided  for  the  fusion  of  the  National  Bank 
of  the  Kingdom  of  Italy  with  the  National  Bank  of  Tus- 
cany and  the  Tuscan  Bank  of  Credit.  The  name  of  the 
new  institution  is  simply  the  Bank  of  Italy,  and  it  is  required 
to  establish  offices  or  branches  wherever  they  have  been 
established  by  the  National  Bank  of  Tuscany.  The  capital 
of  the  new  bank  was  fixed  at  300,000,000  lires  ($60,000,000) 
and  its  privileges  were  confirmed  for  twenty  years.  The 
Roman  Bank  was  already  in  process  of  liquidation  when  this 
act  was  passed,  so  that  the  only  remaining  banks  of  issue 
are  those  of  Naples  and  Sicily.  The  maximum  limit  of  cir- 
culation during  the  continuance  of  the  forced  legal  tender 
policy,  was  fixed  at  800,000,000  lires  for  the  Bank  of  Italy, 
242,000,000  lires  for  the  Bank  of  Naples,  and  55, 000,000  lires 
for  the  Bank  of  Sicily.  This  circulation  is  to  be  reduced 
every  two  years  after  1897,  and  until  in  1907  it  shall  stand 


1  Le  Marche  Financier  en  1893-94,  I3I- 


24  HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

a,t  630,000,000  lires  for  the  Bank  of  Italy,  190,000,000  for  the 
Batik  of  Naples,  and  44,000,000  lires  for  the  Bank  of  Sicily, 
making  a  total  of  864,000,000  lires.  If  either  bank,  at  the 
end  of  fourteen  years  from  the  date  of  the  law,  lacked  a  reserve 
corresponding  to  one-third  of  its  circulation,  the  circulation 
was  to  be  reduced  within  three  months,  and  the  amount  of 
the  reduction  transferred  to  the  banks  which  held  or  paid 
in  the  necessary  reserve.1  The  banks  are  authorized  to 
increase  their  circulation  beyond  the  legal  limits  when  their 
notes  are  entirely  covered  by  legal  coin  or  by  gold  bullion, 
and  notes  may  be  issued  beyond  the  limit  for  the  purpose  of 
advances  to  the  government. 

The  reserves  of  the  banks,  when  on  a  specie  basis,  are  fixed 
at  forty  per  cent,  of  the  circulation,  including  thirty- three 
per  cent,  in  coin  or  bullion  and  the  remainder  in  foreign 
bills  of  exchange  approved  by  the  Minister  of  the  Treasury. 
The  metallic  reserve  is  required  to  consist  of  gold  in  the 
proportion  of  at  least  three-quarters.  The  law  provided  that 
bills  then  in  circulation  should  cease  to  be  a  legal  tender  after 
December  31,  1897,  and  should  no  longer  be  redeemable  after 
December  31,  1902.  A  permanent  supervision  over  banks 
of  issue  is  established  through  a  board  consisting  of  the  Min- 
ister of  Agriculture,  Industry  and  Commerce,  and  the  Minis- 
ter of  the  Treasury.  A  special  inspection  is  to  be  made 
under  the  authority  of  these  ministers  every  two  years,  and 
the  results  reported  to  Parliament  within  three  months.  The 
nomination  of  the  director  general  of  the  Bank  of  Italy 
must  be  approved  by  the  government.  One  of  the  provisions 
of  the  law  provided  that  if  the  deposits  exceeded  a  certain 
figure,  the  bank  must  reduce  its  circulation  by  three-quarters 
of  the  deposits  bearing  interest  in  excess  of  the  limit ;  but 
this  provision  was  suspended  by  decree  of  January  23,  1894.' 

The  new  banking  law  did  not  rescue  Italy  from  the  regime 
of  depreciated  currency  and  was  probably  not  expected  to 
do  so.  The  government  was  reduced  to  subterfuges  to  in- 

1  Section  2,  Law  of  August  10, 1893,  Bulletin  de  Statistique,  XXXIV., 

254- 

-  Bulletin  de  Statistique,  February,  1894,  XXXV.,  207. 


ANCIENT  AND  MODERN  BANKING  IN  ITALY.      25 

crease  the  volume  of  paper  money  and  provide  itself  with 
funds  to  meet  pressing  obligations.  The  decree  of  January 
23,  1894,  permitted  a  supplementary  issue  of  bank-notes  to 
the  amount  of  90,000,000  lires  for  the  Bank  of  Italy,  28,000,- 
ooo  for  the  Bank  of  Naples,  and  7,000,000  for  the  Bank  of 
Sicily.  These  new  issues  were  not  directly  authorized,  but 
the  penal  tax  imposed  by  the  banking  law  was  reduced  to 
two- thirds  of  the  rate  of  discount  up  to  the  limit  of  the  pro- 
posed new  issue.  A  decree  a  month  later,  February  21, 
1894,  purported  to  put  a  limit  of  600,000,000  lires  on  the 
circulation  of  State  notes,  and  Article  5  of  the  same  decree 
provided  that  the  banks  might  redeem  their  notes  on  pre- 
sentation at  the  market  rate  of  depreciation.  This  favor 
was  only  to  be  accorded,  however,  to  the  banks  which  com- 
plied with  the  requirement  of  Article  2,  that  they  transfer  to 
the  credit  of  the  government  200,000,000  lires  in  gold  and 
accept  a  new  issue  of  government  notes  as  a  substitute. 1  The 
new  notes,  of  which  145,000,000  lires  were  apportioned  to 
the  Bank  of  Italy,  45,000,000  lires  to  the  Bank  of  Naples, 
and  10,000,000  lires  to  the  Bank  of  Sicily,  were  thus  nomi- 
nally covered  by  gold,  but  no  provision  was  made  for  reduc- 
ing the  volume  of  outstanding  bank-notes  or  for  replacing 
the  gold  withdrawn  from  the  bank  reserves. 

The  result  of  measures  like  these  was  to  drag  Italy  deeper 
and  deeper  into  the  mire,  make  the  rates  of  foreign  exchange 
more  and  more  unfavorable  and  the  receipts  of  the  Treasury 
of  constantly  diminishing  value  in  gold.  The  additional 
issue  of  bank-notes  authorized  by  the  decree  of  January  23, 
1894,  was  avowedly  for  the  purpose  of  meeting  the  demands 
of  the  depositors  in  the  savings  banks,  who  upon  demanding 
the  restoration  of  the  deposits  they  had  made  in  good  money 
were  reduced  to  the  choice  of  leaving  their  deposits  in  the 
hands  of  a  discredited  government  or  accepting  the  paper 
promises  of  the  suspended  banks.  One  of  the  expedients 
adopted  to  protect  the  Treasury  was  the  levy  of  a  tax  of 
twenty  per  cent,  on  the  interest  of  the  public  debt,  which  was 


1  Bulletin  de  Statistique,  March,  1894,  XXXV.,  335. 


26  HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

only  an  indirect  way  of  scaling  the  interest  on  the  consoli- 
dated five  per  cents,  to  four  per  cent.1  The  depreciation  of 
the  paper  currency  became  so  great  as  to  drive  all  subsi- 
diary coins  out  of  the  country  and  make  it  difficult  to  get 
change  for  a  note  of  a  few  lires.  Twenty  million  lires  was 
issued  during  1894  in  nickel  pieces  of  twenty  centimes,  and 
the  government  congratulated  themselves  on  a  profit  of 
17,500,000  lires  by  means  of  the  seignorage. 

The  flight  of  subsidiary  money  from  Italy  carried  it  to 
France,  Switzerland,  and,  to  some  extent,  to  Belgium,  where 
it  passed  in  ordinary  transactions  upon  the  same  terms  as 
the  money  of  those  countries.  So  much  Italian  silver  drifted 
into  Southern  France  that  the  French  government  made  an 
investigation  of  the  amount  received  on  a  given  day  at  some 
of  the  leading  banks  and  found  that  Italian  pieces  consti- 
tuted 28.78  per  cent,  of  the  entire  subsidiary  circulation. 
Belgian,  Swiss,  and  Greek  pieces  constituted  12.30  per  cent., 
so  that  the  proportion  of  French  coins  was  only  58.92  per 
cent.  Italian  subsidiary  coin  constituted  more  than  seventy 
per  cent,  of  the  circulation  in  Savoie  and  the  Maritime  Alps 
and  from  45  to  60  per  cent,  in  eight  other  departments  be- 
tween the  Rhone  and  the  Alps.2  A  conference  of  the  states 
of  the  Latin  Union,  held  at  Paris,  reached  an  agreement  on 
November  15,  1893,  by  which  the  Italian  subsidiary  coins 
were  to  cease  in  four  months  to  be  received  by  public  deposi- 
taries in  France.  Those  in  the  Bank  of  France  were,  upon 
presentation  to  the  Italian  government,  to  be  redeemed  half 
in  gold  and  half  by  bills  of  exchange.  The  amount  thus 
presented  up  to  the  close  of  1894  was  57,222,279  lires.3  The 
policy  adopted  by  the  Italian  government  for  preventing  the 
continued  exportation  of  the  silver,  of  locking  it  up  in  the 
Treasury  and  issuing  small  notes  against  it,  was  sanctioned 
by  the  conference  upon  the  condition  that  the  subsidiary 


1  Le  Marche  Financier  en  1893-94,  I3^. 
9  Le  Marche  Financier  en  1893-94,  34&-6S. 

3  Assemblee  Generale  des  Actionnaires  de  la  Banque  de  France  du 
31  Janvier,  1895,  P-  9- 


ANCIENT  AND  MODERN  BANKING  IN  ITALY.      2/ 

silver  of  Italy  should  never  exceed  the  limit  of  six  lires  per 
head  originally  fixed  by  the  L,atin  Union. 

The  report  of  the  Minister  of  the  Treasury,  Sidney  Son- 
nino,  to  the  Chamber  of  Deputies,  on  December  10,  1894, 
offered  only  a  distant  hope  of  the  restoration  of  sound  finan- 
cial conditions  in  Italy.     The  result  of  the  special  examina- 
tion of  the  banks  in  February  was,  in  his  own  words,  "  not 
very  favorable. ' '     The  Minister  proposed  a  somewhat  elabo- 
rate scheme  of  law  to  put  in  effect  a  convention  between  the 
bank  and  the  Treasury.     The  period  of  liquidating  the  un- 
available  assets   of  all   the  banks  was  extended  to  fifteen 
years.     The  Bank  of  Italy  assumed  the  liquidation  of  the 
affairs  of  the  Roman  Bank  and  received  in  return  the  cus- 
tody of  the  public  funds  in  the  provinces,  paying  interest  at 
one  and  a  half  per  cent,  on  sums  above  40,000,000  lires. 
The  bank  was  required  to  deposit  with  the  Treasury  a  guar- 
antee fund  of  50,000,000  lires  in  national  securities  and  to 
increase  the  amount  within  six  years  to  90,000,000  lires  ;  to 
increase  the  limit  of  advances  to  the  Treasury  from  90,000,- 
ooo  to  100,000,000  lires  ;   to  call  upon  shareholders  for  an 
assessment  of  100  lires  per  share,  amounting  to  30,000,000 
lires,  and  to  reduce  the  capital  by  an  equal  amount.     The 
bank  was  required  to  set  aside  4,000,000  lires  in  1894,  5,000,- 
ooo  lires  in  1895,  an(i  thereafter  6,000,000  lires  annually,  to 
be  invested  in  national  securities  to   form   a  reserve  fund 
to   cover  the  losses  by  the  Roman  Bank,  rnd  any  profit 
which  might  remain  was  allowed  to  be  divided  among  the 
shareholders   to  a  maximum  limit  of  40  lires  per  share.1 
This  remarkable  method  of   liquidation, — by   converting 
locked-up   assets  into   a  new  form  of  such  assets,  instead 
of  paying  off  liabilities, — was  approved  by  the  shareholders 
of  the    Bank    of   Italy    on    February   25,    1895,    f°r  they 
practically  had  no  option  but  to  accept  the  proposals  of 
the  government.2 


1  Bulletin  de  Statistique,  December,  1894,  XXXVI.,  587-89. 

2  Raffalovich,  Le  Marchk  Financier  en  1894-95,  r77« 


28  HISTOR  Y  OF  MODERN  BANKS  OF  ISSUE. 

Out  of  these  difficulties  Italy  was  lifted  within  a  few  years 
by  the  constructive  ability  of  her  leading  statesmen  and  the 
recuperative  energy  of  her  people.  Already,  before  the  out- 
break of  the  bank  scandals  of  1893,  Signor  Rudini,  the 
Premier  of  the  day,  had  urged  the  adoption  of  rigid  econo- 
mies in  all  branches  of  the  public  administration  and  had 
deplored  the  "  multiplied  and  gigantic  projects,  out  of  pro- 
portion to  her  powers,"  which  had  been  saddled  upon  the 
budget  of  the  kingdom.1  The  first  efforts  at  reform  were 
counteracted  by  the  cost  of  the  expedition  to  Erythrea, 
which  failed  so  disastrously  in  1896;  but  with  the  advent 
of  Signor  Luzzatti  to  the  head  of  the  finances  a  surplus  of 
9,000,000  lires  took  the  place  in  1898  of  the  recurring  deficits 
which  had  so  complicated  the  relations  of  the  Treasury  with 
the  banks.  Reciprocity  with  France,  abandoned  in  1887 
with  disastrous  results  to  Italian  exports,  was  reestablished 
November  21,  1898,  and  was  followed  by  an  increase  in  total 
exports  from  1,091,000,000  lires  ($210,000,000)  in  1897  to 
1,472,000,000  lires  ($284,000,000)  in  1902. a  Remittances  to 
meet  the  interest  on  the  national  debt  held  abroad  were 
reduced  for  several  years  by  the  drastic  process  of  the  return 
of  the  debt  to  Italy,  until  interest  payments  abroad  fell 
from  192,000,000  lires  in  1893  to  105,000,000  lires  in 

1897.' 

But  these  measures  of  rectification  began  to  produce  re- 
sults. From  1891  to  1902  public  revenue  advanced  by  203,- 
400,000  lires,  while  expenditures  advanced  only  by  62,560,000 
lires,  and  the  total  surplus  of  the  budgets  for  five  }rears  ending 
with  1902  was  212,300,000  lires  ($4i,ooo,ooo).4  Exchange  on 
Paris,  which  reached  a  maximum  in  1894  of  115.70,  fell  to 
a  minimum  in  1901  of  101.50,  and  in  August,  1902,  it  was 
hailed  as  a  notable  event  that  the  premium  was  only  80 

1  Fochier,  in  Questions  Monetaires  Contemporaines,  454. 

2  The  denunciation  of  the  treaty  with  France  was  due  partly  to 
political  motives  and  was  accompanied  by  withdrawals  of  French 
capital  from  Italian  investments. — Brouet,  14. 

3  Vide  the  author's  Principles  of  Money  and  Banking,  II.,  346. 

4  Therv,  Situation  Econornique  et  Financiere  de  /'  Italic^  82. 


ANCIENT  AND  MODERN  BANKING  IN  ITALY.      2$ 

centimes,  or  four-fifths  of  one  per  cent.1  Then  came  in 
October  the  restoration  of  parity,  which  has  ever  since  been 
substantially  maintained. 

Both  the  Treasury  and  the  banks  aided  in  the  restoration 
of  sound  conditions.  The  Treasury  began  in  1898  the  re- 
tirement of  the  small  notes  which  had  driven  silver  across 
the  French  and  Swiss  borders,  and  by  1903  had  reduced  the 
amount  from  1 10,000,000  lires  to  2,358,000  lires.  A  decree  of 
February  18,  1899,  restored  to  circulation  20,000,000  lires  in 
subsidiary  silver,  and  a  law  of  March  3d  reduced  by  45,000,000 
lires  the  special  circulation  of  the  Treasury.3  Customs  duties 
were  collected  in  gold,  with  the  result  of  a  rapid  increase  of 
gold  resources.  On  behalf  of  the  failed  banks,  the  Bank 
of  Italy  addressed  itself  resolutely  to  reducing  the  mass  of 
locked  up  or  unliquid  assets,  which  amounted  in  1894  to 
about  501,000,000  lires  ($96,700,000).  This  amount  was 
reduced  by  the  close  of  1899  to  245,000,000  lires,  in  spite  of 
some  friction  with  the  government  in  the  latter  year  over 
the  proposal  to  create  a  special  corporation  to  take  the 
matter  in  hand.3  The  Minister  of  the  Treasury,  at  the  be- 
ginning of  1903,  in  his  presentation  of  the  budget,  declared 
that  it  was  '  *  an  immense  advantage  for  the  general  economy 
of  the  country  to  possess,  like  other  great  states,  a  potent 
organism  which  knows  how  to  exercise  the  double  function 
of  regulator  of  the  money  market  and  of  a  faithful  and 
trustworthy  aid  to  the  public  finances."4 

Some  changes  were  made  by  a  law  of  1900  in  the  statutes 
of  the  banks  of  Italy  affecting  their  note  circulation.  The 
legal  limit  of  issue  not  fully  covered  by  the  reserve  was  to 
be  subjected  to  an  annual  reduction  which  should  leave  the 
total  in  1906  for  the  Bank  of  Italy  at  630,000,000  lires;  Bank 
of  Naples,  190,000,000  lires;  and  Bank  of  Sicily,  44,000,000 
lires.6  The  banks  were  required  to  accumulate  a  reserve  of 

1  Fochier,  467. 

2  Raffalovich,  Le  Marche  Financier  en  1898-99,  593. 

3  Economiste  Europeen  (April  6,  1900),  XVII.,  443. 
*  Th£ry,  148. 

s  Amaune,  La  Monnaie,  le  Credit  et  le  Change,  third  edition,  446. 


30  HISTOR  Y  OF  MODERN  BANKS  OF  ISSUE. 

forty  per  cent.,  part  of  which  might  be  in  foreign  securities. 
Excess  issues  subject  to  tax  continued  to  be  permitted,  sub- 
stantially as  provided  by  the  law  of  1893.  This  law,  how- 
ever, imposing  a  charge  of  two-thirds  of  the  rate  of  discount 
on  the  amount  of  the  circulation  in  excess  of  the  legal  limit, 
was  modified  by  a  law  of  December  31,  1907,  so  as  to  afford 
a  little  greater  elasticity  to  the  movement  of  the  circulation.1 
The  time  seemed  at  length  to  have  come  when  the  danger 
was  passed  that  the  circulation  would  be  unduly  expanded 
and  when  the  legitimate  business  demands  of  the  country 
had  more  than  grown  up  to  the  limits  imposed  by  law.  The 
bank  was  subjected  to  severe  pressure  during  the  crisis  in 
America.  Discounts  rose  from  398,290,560  lires  on  July  31, 
1907,  to  494,988,781  lires  on  November  3oth,  and  advances 
rose  in  the  same  interval  from  40,002,533  lires  to  75,257,128 
lires.  The  discount  rate  was  advanced  to  five  and  a  half 
per  cent. — the  highest  rate  touched  since  1894.  The  demand 
for  accommodation,  while  it  swelled  note  issues  from  1,265,- 
692,550  lires  on  June  3Oth  to  1,412,418,450  lires  on  Novem- 
ber 3oth,  did  not  at  any  time  cause  a  reduction  of  reserves, 
which  increased  during  the  same  interval  from  932,014,944 
lires  to  1,099,995,262  lires  ($212,300,000).  Only  during  five 
weeks  of  this  period  was  circulation  issued  under  the  special 
tax  and  the  maximum  subject  to  tax  was  only  48,619,046 
lires  ($9,480,000). 

The  adequacy  of  the  reserve  was  no  longer  in  question  at 
the  Bank  of  Italy  in  1907.  The  gold  held  at  the  close  of 
that  year  was  896,307,000  lires  ($173,000,000)  and  the  silver 
122,475,000  lires  ($23,640,000).  Between  the  maximum  and 
minimum  circulation  there  was  a  difference  of  304,000,000 
lires,  or  21.4  per  cent,  of  the  maximum.2 

The  Bank  of  Italy,  like  the  Bank  of  France,  rediscounts 
much  paper  for  small  amounts  for  the  benefit  of  retail  trades- 
men. The  classification  of  the  paper  discounted  during 
1907,  which  reached  a  total  value  of  2,261,968,257  lires 
($436,500,000),  showed  that  232,387  pieces  were  for  amounts 

i~Adunanza  Generate  Ordinaria  degli  Azionisti,  1908,  9. 

9  Ibidem,  35. 


ANCIENT  AND  MODERN  BANKING  IN  ITALY.      31 


up  to  ioo  lires  ($19.30)  and  1,147,640  pieces  for  amounts 
from  ioo  lires  up  to  1000  lires  ($193),  leaving  only  268,534 
pieces  for  larger  amounts. '  The  average  value  per  piece  of 
paper  discounted  was  1397.52  lires  and  the  average  term  59 
days.  The  average  value  in  1904  was  959.41  ;  in  1905, 
1140.75  ;  and  in  1906,  1204.44  lires. 

The  following  table  shows  the  principal  items  of  the 
balance  sheet  of  the  Bank  of  Italy  for  representative  years 
since  the  failures  of  1893  : 

THE  BANK  OF  ITALY. 


CURRENT  AC- 

DEC. 31 

METALLIC 

CIRCULATION 

COUNTS  AND 

DISCOUNTS 

ADVANCES 

RESERVE 

DEPOSITS 

(in  millio 

is  of  lires) 

1894 

362 

826 

213 

191 

28 

I896 

364 

773 

208 

221 

24 

I898 

367 

831 

232 

313 

14 

1900 

351 

820 

192 

331 

35 

1902 

402 

855 

172 

344 

46 

1904 

562 

914 

185 

340 

39 

I9°5 

720 

1005 

185 

401 

72 

1907 

1018 

1411 

212 

480 

7i 

The  Bank  of  Naples  has  shared  in  some  degree  the  pro- 
sperity of  the  national  bank.  Material  progress  was  made 
after  1900  in  the  liquidation  of  mortgage  obligations,  and 
savings  deposits  attained  a  volume  second  to  those  of  only 
one  other  institution  in  Italy.2  Total  assets  at  the  close  of 
1907  were  590,597,829  lires  ($114,000,000),  of  which  181,- 
153,631  lires  was  in  gold,  15,810,131  in  silver,  107,255,871  in 
commercial  paper,  and  80,285,532  in  government  securities. 
Circulation  was  360,319,200  lires  ($59,500,000)  and  current 
debtor  accounts  were  88,921,791  lires. 

1  Adunanza  Generate  Ordinaria  degli  Azionisti,  1908,  27. 

2  Jiconomiste  Europeen,  May  i,  1908,  XXXIII.,  572. 


CHAPTER  III. 

BANKING    IN    FRANCE. 

The  Events  Out  of  Which  the  Bank  of  France  has  Grown— The  Mis- 
sissippi Bubble  of  John  Law  and  its  Collapse— The  Banks  of 
Paris  before  the  Revolution — Failure  of  the  Assignats  and  the 
Revival  of  Commercial  Banking— Birth  of  the  Bank  of  France 
and  its  Absorption  of  the  Departmental  Banks— The  Latin  Union 
and  the  Embarrassments  Caused  by  the  Fall  in  the  Price  of  Silver 
—The  Recent  Renewal  of  the  Bank  Charter. 

THE  Bank  of  France  is  the  greatest  and  in  many  respects 
the  strongest  of  the  banks  of  the  world,  and  its  devel- 
opment exhibits  many  of  the  most  interesting  phases 
of  banking  history  outside  of  Great  Britain.  French  bank- 
ing is  done  pre-eminently  through  the  issue  of  circulating 
notes,  and  the  per  capita  monetary  circulation  of  France  is 
greater  than  that  of  any  other  country.  The  origins  of 
banking  in  France  go  back  to  the  "  Mississippi  plan"  of 
John  I^aw,  but  its  history  during  the  present  century  has 
been  essentially  one  of  prudence  and  moderation,  if  not  al- 
ways of  the  most  enlightened  financial  policy.  Monopoly 
of  the  power  of  note  issue  now  belongs  to  the  Bank  of  France, 
but  is  far  from  having  been  its  immemorial  right.  The 
regime  of  the  independent  departmental  banks,  which  were 
absorbed  by  the  central  institution  in  1848,  is  still  recalled 
with  pride  by  many  French  economists,  and  the  most  recent 
expiration  of  the  charter  of  the  Bank  of  France  inspired 
them  to  a  renewal  of  the  contest  then  so  warmly  waged 
between  "  monopoly"  and  "  liberty." 

The  first  French  bank  of  issue  was  created  by  John  Law 
under  the  regency  of  the  Duke  of  Orleans,  at  the  beginning 

32 


BANKING  IN  FRANCE.  33 

of  the  eighteenth  century.  Scotland,  which  gave  to  the 
world  the  founder  of  the  classical  school  of  political  economy 
in  Adam  Smith,  was  also  the  birthplace  of  Law,  the  author 
of  "The  System"  which  introduced  the  use  of  negotiable 
securities  on  a  broad  scale  into  France.  The  name  of  Law 
has  been  synonymous  with  the  most  reckless  speculation  and 
brazen  fraud,  but  the  bank  which  he  founded  was  at  the  out- 
set conducted  upon  conservative  principles,  and  even  the  sys- 
tem of  the  "  Company  of  the  West ' '  (Compagnie  d?  Occident}, 
more  generally  known  as  the  Mississippi  Company,  was 
conceived  upon  broad  and  not  impossible  lines  before  the 
stock  was  made  the  plaything  of  speculation.  Law  desired 
to  establish  a  royal  bank  of  state,  but  the  government  was 
only  willing  to  grant  a  charter  for  an  institution  managed  by 
private  citizens.  The  bank  thus  founded  by  letters  patent 
May  2,  1716,  was  authorized  to  issue  bills  in  crowns  of 
specie  under  the  name  of  "bank  crowns,"  redeemable  in 
money  of  the  weight  and  denomination  of  the  day  of  issue.1 
This  was  intended  to  guard  the  bank-notes  against  the  possi- 
ble fluctuations  and  changes  in  the  metallic  standard  and 
give  them  some  such  preference  as  that  given  to  the  "  bank 
money"  of  the  Bank  of  Amsterdam.  The  feature  which 
rapidly  attracted  subscriptions  to  the  stock  was  Law's  offer 
to  accept  payment  at  the  rate  of  twenty-five  per  cent,  in 
specie  and  seventy-five  per  cent,  in  bills  of  state,  which 
were  at  a  discount  of  about  seventy-five  per  cent. 

Discount  was  granted  by  the  bank  at  the  rate  of  five  per 
cent.,  and  officers  of  the  finances  received  orders  in  October, 
1716,  to  make  their  remittances  upon  Paris  in  bank-bills, 
and  to  redeem  these  bills  at  sight  when  presented  to  them. 
Another  official  decree  of  April  10,  1717,  authorized  the 
receipt  of  the  bills  as  money  for  the  payment  of  public 
revenues.  If  the  bank  had  continued  upon  the  sound 
basis  of  a  bank  discounting  commercial  paper  and  acting 
as  the  fiscal  agent  of  the  Treasury,  France  would  have 
been  under  a  great  debt  of  gratitude  to  Law  for  introducing 
into  her  commercial  relations  the  methods  of  the  modern 


1  Courtois,  10. 

3 


34  HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

business  world.  Prof.  H.  Dunning  MacLeod,  as  keen  a 
thinker  and  acute  a  critic  as  has  written  upon  monetary  sub- 
jects, says  : 

Nothing  could  be  more  extraordinary  than  the  restoration  of  pros- 
perity caused  by  the  foundation  of  Law's  Bank  in  1716.  It  is  proba- 
bly one  of  the  most  marvellous  transitions  from  the  depths  of 
misery  to  the  height  of  prosperity  in  so  short  a  space  of  time  in  the 
annals  of  any  nation.  And,  if  Law  had  confined  himself  to  that,  he 
would  have  been  one  of  the  greatest  benefactors  any  nation  ever  had.1 

But  Law  had  much  more  comprehensive  schemes  than  the 
creation  of  a  bank  of  discount.  He  determined  to  unite 
into  a  single  great  monopoly  the  various  commercial  compa- 
nies which  had  been  incorporated  since  the  discovery  of 
America,  for  the  purpose  of  trade  and  the  extension  of 
French  influence.  Courtois  enumerates  no  less  than  thirty 
of  these  corporations  which  had  been  authorized  during  the 
previous  century,  but  many  of  them  had  languished,  run  in 
debt,  and  been  consolidated  with  others.  Law  proposed  a 
stock  company  with  a  capital  of  100,000,000  livres,  divided 
into  200,000  shares  of  500  livres  each,  payable  in  bills  of 
state  which  were  still  at  a  discount  of  about  sixty-six  per 
cent.2  The  State  was  to  pay  the  company  an  annual  interest 
of  four  per  cent,  on  the  principal  of  the  bills  withdrawn  by 
this  means  from  circulation. 

The  Compagnie  cT  Occident  was  incorporated  by  a  decree 
of  August  28,  1717,  registered  by  the  Parliament  on  Sep- 
tember 6th,  for  a  duration  of  twenty-five  years.  Four  compa- 
nies were  consolidated  at  the  outset,  which  controlled  the 
commerce  of  Louisiana,  Canada,  and  the  Western  Coast  of 
Africa,  and  the  new  company  was  to  enjoy  all  the  rights  of 
sovereignty  over  the  lands  which  it  possessed.  The  shares, 
which  were  made  out  in  certificates  of  one  share  or  ten, 


1  Theory  and  Practice  of  Banking,  II.,  254. 

a  The  variations  in  the  coinage  at  this  time  were  such  as  to  make  a 
statement  of  the  value  of  coins  an  almost  impossible  task,  but  the 
livre  may  be  taken  in  a  general  way  as  about  the  equivalent  of  the 
later  franc— 19.3  cents  in  United  States  gold  coin.  For  a  full  account 
of  the  changes  in  the  coinage  system,  see  Shaw,  396-423. 


BANKING  IN  FRANCE.  35 

were  transferable  by  bearer,  a  system  for  the  first  time  intro- 
duced into  France,  so  far  as  known  ;  for  even  the  shares  of 
bank  were  made  out  to  the  owners.  Law  proceeded  to 
make  negotiations  with  the  government  through  his  friend, 
the  Regent,  for  farming  the  taxes,  for  coining  money,  for 
managing  the  tobacco  monopoly,  which  had  been  under  the 
control  of  the  State,  and  for  assuming  the  entire  public  debt. 
He  introduced  a  number  of  reforms  into  the  collection  of  the 
taxes  by  discontinuing  the  collection  of  those  which  were 
disproportionately  costly  and  vexatious  in  proportion  to  the 
amount  obtained,  and  he  proposed  more  sweeping  changes 
which  would  have  abolished  needless  offices,  consolidated 
various  imposts  into  one,  and  removed  some  of  the  fetters 
from  French  commerce. 

The  attribution  of  all  these  public  functions  to  a  single 
company,  as  well  as  the  management  of  the  commerce  of 
two  continents,  would  in  themselves  probably,  as  Law's 
great  opponent,  Paris-Duverney,  pointed  out,  have  caused 
the  organization  to  break  down  of  its  own  weight,  and  have 
attracted  the  jealousy  of  the  government.  But  I/aw,  and 
those  who  were  carried  away  with  him  by  the  grandeur  of 
the  new  scheme,  did  not  wait  for  the  slow  operation  of  com- 
mercial causes  to  sow  the  seeds  of  destruction  of  their  enter- 
prise. He  succeeded  in  having  the  bank  transformed  into 
a  public  institution  (Banque  Royale)  by  a  decree  of  December 
27,  1718,  and  had  the  stockholders  reimbursed  in  specie 
for  their  subscriptions.  Redemption  of  the  notes  in  bank 
crowns  was  abandoned  by  the  decree  which  made  the  bank  a 
public  one,  and  redemption  was  required  only  in  the  official 
money  of  the  country.  This  move  created  a  degree  of  dis- 
trust which  led  to  a  new  decree  of  April  22,  1719,  that  bills 
payable  in  the  existing  standard  should  not  be  subject  to  the 
diminutions  which  might  affect  specie.  The  tendency  of  such 
a  decree  was  to  put  the  bank-bills  at  a  premium  over  cur- 
rent coins,  which  were  being  perpetually  debased  and  altered 
by  the  wretched  administration  of  the  finances.  The  total 
circulation  of  bills  in  April,  1719,  the  date  of  the  last  decree, 
was  110,000,000  livres  ($22,000,000). 


36  HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

Meantime  the  shares  of  the  Compagnie  d'  Occident  were 
undergoing  a  remarkable  experience.  They  were  sold 
rather  slowly  at  first  and  the  principal  subscription  was  by 
the  former  stockholders  of  the  bank,  who  subscribed  their 
receipts  from  the  bank  shares  (1,125,000  livres  in  bills  of 
state  and  375,000  livres  in  specie)  for  the  stock  of  the  new 
company.  L,aw  found  it  necessary,  in  order  to  stimulate  the 
sale  of  the  shares,  to  buy  publicly  some  two  hundred  shares 
at  par,  of  which  200  livres  per  share  was  paid  as  a  margin, 
with  the  option  of  completing  the  transaction  in  six  months. 
Dealing  in  options  (marchS  &  prime)  was  thus  brought  into 
general  practice  for  the  first  time  in  France.  The  making 
of  the  contracts  for  the  tobacco  monopoly,  the  extension  of  the 
commercial  operations  of  the  company  and  the  wresting  of 
the  farming  of  the  revenues  from  the  Paris  brothers,  who 
had  formerly  controlled  it,  gave  a  great  stimulus  to  the  mar- 
ket value  of  the  stock,  and  Law  was  authorized  to  issue  fifty 
thousand  new  shares  at  a  premium  of  one  hundred  per  cent. , 
to  pay  the  government  the  sum  guaranteed  by  the  new  con- 
tracts. The  value  of  the  old  shares  was  maintained  by 
requiring  their  presentation  to  obtain  the  new  ones.  The 
original  issue  thus  came  to  be  known  as  the  ' '  mothers ' ' 
(meres)  of  the  second,  which  were  called  the  "  daughters  " 
(filles),  while  the  third  issue  was  known  as  the  "grand- 
daughters" (petites-filles).  The  contract  with  the  govern- 
ment for  assuming  the  entire  public  debt  upon  a  pledge  by 
the  state  to  pay  annually  three  per  cent,  interest  was  author- 
ized October  12,  1719,  and  the  payment  of  the  interest  was 
assured  to  the  company  by  its  contract  for  collecting  the 
revenues.  Three  successive  issues  of  one  hundred  thousand 
shares  in  the  Compagnie  des  Indes 1  were  thought  necessary  to 
carry  through  this  gigantic  operation.  The  new  shares  were 
of  a  par  value  of  500  livres  each  but  were  issued  at  a  price  of 

1  The  name  of  the  Compagnie  d' Occident  was  changed  to  the 
Compagnie  des  Indes  in  May,  1719,  when  the  privileges  of  the  two 
companies  of  the  West  Indies  and  of  China  were  absorbed  by  Law's 
Company,  and  the  new  name  was  retained  until  the  dissolution  of 
the  company  in  1769.— Courtois,  20. 


BANKING  IN  FRANCE.  37 

5000  livres,  payable  ten  per  cent,  a  month.  The  presentation 
of  the  old  shares  was  not  required  for  the  purchase  of  these 
last  issues  and  the  price  was  rapidly  forced  upward  until 
10,000  livres  per  share  was  attained  in  November,  1719. 

Whatever  might  have  been  the  success  of  so  comprehensive 
a  scheme  under  sound  management,  the  fever  of  speculation 
had  forced  the  shares  to  a  point  where  a  reasonable  dividend 
was  impossible.  Law  announced  at  a  general  meeting  of 
the  shareholders  on  December  30,  1719,  a  total  revenue  of 
91,000,000  livres, — 48,000,000  from  the  interest  on  the  pub- 
lic debt,  to  be  retained  from  the  taxes  ;  12,000,000  from 
profit  on  the  farming  of  the  taxes ;  6,000,000  from  tobacco  ; 
1,000,000  from  general  taxes  not  covered  by  the  farming  of 
the  revenues;  12,000,000  from  profits  of  the  coinage  ;  and 
12,000,000  from  the  commercial  operations  of  the  company. 
The  actual  par  value  of  the  outstanding  shares  was  312,000,- 
ooo  livres,  which  would  have  afforded  a  profit  of  nearly 
thirty  per  cent.,  and  a  dividend  of  200  livres  per  share 
was  actually  declared  on  January  i,  1720;  but  the  shares 
had  been  selling  at  12,000  livres,  or  twenty-four  times  their 
par  value,  which  afforded  an  actual  dividend  of  only  one 
and  two-thirds  per  cent.  Notwithstanding  the  doubtful 
character  of  some  of  the  profits  claimed  and  their  palpable 
insufficiency  to  pay  large  dividends  upon  such  an  inflated 
investment,  the  phrenzy  of  speculation  forced  the  shares  by 
January  6,  to  18,000  livres — thirty-six  times  their  nominal 
par  value.  The  Rue  Quincampoix,  between  the  Rue  Saint- 
Denis  and  the  Rue  Saint-Martin,  had  been  since  the  close 
of  the  reign  of  Louis  XIV.  the  meeting  place  of  speculators 
and  dealers  in  the  public  stocks.  Such  operations  attained 
a  new  extension  by  the  speculations  in  the  shares  of  the 
Compagnie  des  Indes.  Fortunes  were  won  and  lost  in  a  day 
and  feeling  became  so  violent  that  the  place  was  closed  by 
the  government  and  the  speculators  were  driven  into  obscure 
corners  in  other  parts  of  the  city,  where  they  were  constantly 
on  the  watch  for  the  police.1 

1  The  decree  of  October  25,  1720,  forbidding  speculative  operations 
in  the  public  streets  is  of  interest  because  it  established  the  sixty 


38  HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

The  New  Year  of  1720  and  the  declaration  of  the  dividend 
marked  the  apogee  of  L/aw's  system.  The  craze  had  sub- 
stantially run  its  course  and  the  reaction  was  setting  in. 
Prices  were  rising  under  the  impulse  of  the  excessive  issues 
of  bank-bills  and  the  more  prudent  speculators  were  endeav- 
oring to  convert  their  gains  into  more  solid  property  by  the 
purchase  of  real  estate  or  by  shipping  gold  abroad.  The 
bank  had  already  been  authorized  to  issue  1,000,000,000 
livres  and  there  had  been  issues  without  authority  and 
counterfeits,  which  were  easily  made  because  the  genuine 
bills  were  so  rapidly  and  crudely  turned  out.  Specie  began 
to  disappear  and  the  subsidence  of  speculation  made  the  bills 
redundant.  L,aw  adopted  the  now  familiar  argument  in 
favor  of  paper  money,  that  it  was  to  be  preferred  over  coin 
because  it  was  non-exportable.  A  series  of  decrees  during 
the  early  months  of  1720  sought  to  discredit  coined  money 
and  maintain  the  currency  of  the  bank-bills.  The  nominal 
value  of  coin  was  reduced  ;  the  quantity  of  specie  which  an 
individual  was  permitted  to  hold  was  limited  ;  the  sale  of 
vessels  of  gold  or  silver  was  prohibited  ;  the  carrying  of 
diamonds  and  precious  stones  was  prohibited  ;  the  circulation 
of  bills  throughout  the  realm  as  legal  tender  was  decreed  ; 
an  advantage  was  accorded  those  who  paid  certain  taxes  in 
bills  rather  than  specie  ;  and  special  jurisdiction  was  given 
the  Council  of  State  for  causes  concerning  bank-bills.1  All 
these  measures,  failed  to  maintain  confidence  in  the  super- 


agents  of  exchange  (agents  de  change]  who  still  form  the  legal  body 
of  the  Paris  Bourse.  Their  places  are  transmissible  and  hereditary. 
The  Bourse  decides  what  stocks  shall  be  admitted  to  its  lists  and  only 
those  representing  a  large  capital  are  ever  listed.  The  corporation 
which  has  been  formed  by  the  members  inspires  absolute  confidence 
in  its  operations  by  voluntarily  assuming  corporate  responsibility  for 
the  acts  of  its  members  in  their  legitimate  capacity  as  brokers.  This 
corporation  has  instituted  a  clearing  house  and  was  strong  enough  in 
the  crisis  of  1882  to  borrow  80,000,000  francs  ($16,000,000)  from  the 
Bank  of  France,  guaranteed  by  the  Rothschilds  to  the  amount  of 
40,000,000  francs  and  by  the  leading  societies  of  credit  for  40,000,000 
more.— Jannet,  347-48. 
1  Courtois,  44. 


BANKING  IN  FRANCE.  39 

abundant  mass  of  paper  and  the  control  of  the  bank  was 
turned  over  to  the  Compagnie  des  Indes.  The  company  was 
authorized  to  convert  at  the  will  of  the  holders  shares  in 
the  company  into  bank-bills  or  to  redeem  bills  in  shares,  at 
a  fixed  price  of  9000  livres  per  share.  The  contest  of  paper 
money  against  the  metals  was  continued  by  a  decree  of 
March  nth,  suppressing  gold  and  silver  as  legal  tender  and 
providing  for  the  confiscation  of  gold  or  silver,  whether  coin, 
bullion,  or  vessels,  when  found  in  the  possession  of  subjects. 

But  the  tide  had  turned  and  could  no  longer  be  stemmed. 
The  fall  in  the  stock  continued,  the  company  suffered  in  its 
commercial  operations  by  the  pest,  which  closed  the  free 
port  of  Marseilles,  and  a  decree  of  May  i,  1720,  scaled  the 
value  of  shares  from  month  to  month  until  they  should  be 
reduced  on  December  ist,  to  5500  livres  and  bank-bills  should 
be  reduced  to  fifty  per  cent,  of  their  par  value.  Panic  seized 
upon  every  holder  of  either  form  of  paper,  as  he  saw  the 
values  of  his  property  shrinking  under  legal  decree  with 
every  passing  day.  A  commission  was  appointed  to  exam- 
ine the  bank  and  found  that  against  3,000,000,000  livres  of 
circulation  it  held  21,000,000  livres  in  coin,  28,000,000  in 
bullion  and  240,000,000  in  commercial  bills, — less  than  ten 
per  cent,  of  assets  in  all  against  its  outstanding  notes.  A 
run  upon  the  bank  began  on  the  night  of  July  i6th,  and  the 
crowd  was  so  dense  that  a  dozen  unfortunates  were  choked 
or  trampled  under  foot.  The  corpses  were  placed  upon 
litters  and  borne  to  the  residence  of  the  Regent.  Law 
escaped  from  the  crowd  into  the  palace,  but  his  carriage  was 
broken  in  pieces  and  the  coachman  thrown  from  his  seat 
and  dragged  upon  the  ground.  The  bank  was  closed,  the 
forced  legal  tender  of  the  bank-bills  was  suspended,  the  con- 
tracts of  the  company  with  the  government  were  cancelled, 
and  the  stock  was  called  in  for  readjustment. 

A  decree  appeared  on  January  26,  1721,  known  under  the 
name  of  the  visa,  providing  for  the  liquidation  of  the  affairs 
of  the  company  and  of  the  bank  and  the  readjustment  of  the 
public  debt.  The  decree  was  attributed  to  Paris-Duverney, 
from  whom  Law  had  taken  the  farming  of  the  revenues,  and 


4°  HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

was  confided  to  him  for  execution.  The  attempt  was  made 
to  readjust  private  fortunes  as  well  as  public  obligations 
upon  the  basis  which  had  prevailed  before  the  period  of 
paper  inflation  which  Law  had  inaugurated.  Those  who 
had  fled  the  country  with  their  winnings  transmuted  into 
gold,  those  who  could  command  the  royal  favor,  and  those 
who  were  able  to  keep  their  gains  in  hiding  were  the  only 
ones  who  escaped.  The  mere  transfer  of  speculative  gains 
into  real  property  did  not  prevent  the  exercise  of  arbitrary 
power  to  transfer  the  property  back  to  its  original  owners 
and  remit  the  new  owner  to  his  original  poverty.  A  regular 
scale  of  readjustment  was  prepared  by  which  the  public 
debt  was  reduced  to  its  original  volume  and  the  holders  of 
bills  and  the  stock  of  the  company  were  given  new  public 
obligations  ranging  from  one  hundred  per  cent,  of  their 
holdings  in  certain  cases  down  to  five  per  cent.,  according  as 
they  were  supposed  to  represent  real  values  or  the  profits  of 
stock  gambling. 

The  lesson  of  Law's  disastrous  schemes  and  the  painful 
readjustment  which  followed  them  prevented  for  half  a  cen- 
tury the  creation  of  any  new  bank  of  issue  in  France.  The 
success  of  the  Bank  of  England,  however,  and  the  necessity 
of  some  aid  to  commerce,  led  to  a  futile  attempt  to  found  a 
bank  under  a  decree  of  the  Council  of  State  of  January  i, 
1767, 1  and  the  establishment,  during  the  ministry  of  Turgot, 
by  a  decree  of  March  24,  1776,  of  the  Caisse  d''  Escompte  du 
Commerce  (The  Bank  of  Commercial  Discount).  The  new 
institution  was  limited  to  a  strictly  banking  business,  and 
forbidden  to  borrow  except  by  its  notes  payable  at  sight. 
It  was  authorized  to  begin  operations  with  a  capital  of 
15,000,000  livres  ($3, 000,000),  of  which  it  was  intended  that 
two-thirds  should  be  loaned  to  the  Treasury.  The  loan  to 
the  Treasury  not  having  been  completed  as  proposed,  the 
capital  of  the  bank  was  reduced  to  12,000,000  livres,  repre- 


1  The  proposed  institution  -was  to  be  known  as  the  Caisse  d' Escompte 
and  to  have  a  capital  of  60,000,000  livres,  but  it  never  entered  upon 
active  operations  and  was  suppressed  by  a  decree  of  March  21,  1769. 
— Courtois,  84. 


BANKING  IN  FRANCE.  4! 

sented  by  four  thousand  shares  of  3000  livres  each.  Some 
of  the  most  eminent  public  men  and  financiers  of  Paris 
served  on  the  board  of  directors  of  the  bank,  and  while 
they  were  not  directly  responsible  for  its  management,1  its 
note  issues  were  kept  within  prudent  limits  and  annual 
dividends  were  declared  for  the  first  six  years,  ranging  from 
five  to  eight  per  cent. 

The  first  blow  to  the  bank's  credit  came  from  the  demands 
of  the  government.  The  growing  social  and  economic  diffi- 
culties of  France  were  brought  to  a  climax  by  the  bad  crops 
of  1783  and  caused  a  great  scarcity  of  metallic  money.  The 
new  bank,  after  having  considerably  expanded  its  commer- 
cial discounts,  made  an  advance  to  the  government  at  the 
demand  of  D'Ormesson,  of  6,000,000  livres.  It  was  brought 
face  to  face  with  the  crisis  with  a  circulation  of  45,000,000 
livres  and  with  a  cash  reserve  of  but  little  more  than  4,000,- 
ooo.  There  was  a  sudden  rush  for  the  redemption  of  the 
notes  and  the  bank  appealed  to  the  Treasury  to  reimburse 
the  6,000,000  livres  recently  loaned.  The  government  was 
in  no  condition  to  comply  with  this  demand,  but  it  was 
ready  to  employ  its  sovereign  power  to  enable  the  bank  to 
suspend  specie  payments  and  to  authorize  the  redemption  of 
bills  in  commercial  paper  or  their  non-payment  until  Jan- 
uary i,  1784,  (Decree  of  September  27,  1783).  The  bank 
was  solvent,  however,  and  had  the  courageous  support  of 
the  private  bankers  of  Paris,  who  held  a  large  proportion 
of  its  bills.  A  report  presented  by  the  lieutenant  of  police, 
M.  Le  Noir,  showed  that  the  bills  in  circulation,  amounting 
to  44,724,000  livres,  were  offset  by  47,700,000  livres  in  good 
commercial  paper,  4,121,700  livres  in  gold  and  silver  coin 
and  bullion,  and  6,000,000  livres  held  by  the  Treasury, 


1  The  bank  really  constituted  a  partnership  en  commandite,  for 
which  a  few  individuals  were  legally  responsible,  and  the  use  of  the 
names  of  leading  financiers  as  directors  was  somewhat  akin  to  the 
modern  fraud  of  paying  men  of  high  station  for  the  use  of  their  names 
to  float  irresponsible  enterprises  ;  but  the  practice  in  this  case  appears 
to  have  grown  out  of  the  lack  of  experience  with  stock  companies 
and  to  have  involved  no  intentional  deception. 


42  HIST  OR  Y  OF  MODERN  BANKS  OF  ISSUE. 

making  total  assets  of  57,821,700  livres  and  affording  a 
favorable  balance  of  13,097,700  livres.1 

The  loan  to  the  government  was  soon  repaid,  specie  pay- 
ments were  resumed  under  a  decree  of  November  23,  1783, 
and  the  bank  was  authorized  to  increase  its  capital  to  15,000,- 
ooo  livres,  and  for  four  years  it  continued  to  operate  free  frorr; 
government  interference  and  with  advantage  to  the  business 
community.  Its  growing  prosperity  attracted  the  attention 
of  Calonne,  then  Controller  General,  and  he  determined  to 
turn  it  to  account  for  the  benefit  of  the  State  by  requiring 
the  deposit  of  a  guarantee  fund  with  the  Treasury.  The 
capital  was  raised  from  15,000,000  to  100,000,000  livres  and 
the  net  receipts  in  cash,  amounting  to  80,000,000  livres,  were 
deposited  to  the  amount  of  70,000,000  with  the  Treasury  and 
10,000,000  were  carried  to  the  reserve.  A  new  run  set  in  in 
August,  1787,  but  the  directors  refused  to  accept  a  decree  for 
the  suspension  of  specie  payments,  which  Lomenie  de  Brienne, 
Chief  of  the  Royal  Council  of  Finance,  was  preparing,  de- 
manded help  from  the  guarantee  fund  in  the  possession  of 
the  government,  and  promptly  met  every  obligation. 

But  the  government  was  sinking  into  the  sloughs  of  bank- 
ruptcy and  determined  to  drag  the  bank  with  it,  so  that  there 
should  be  no  stronger  credit  than  its  own  to  put  it  to  shame. 
August  1 8,  1788,  appeared  a  decree  authorizing  the  bank  to 
redeem  its  bills  in  part  in  commercial  paper.  The  decree 
was  unsought  and  its  existence  was  unknown  until  it  was 
affixed  to  the  doors  of  the  bank,  and  the  permission  to  sus- 
pend was  not  embraced  by  the  directors.  But  Necker,  who 
became  Finance  Minister  on  May  25,  1789,  continued  to  insist 
upon  secret  loans  to  the  Treasury,  and  the  government  and 
the  bank  soon  became  so  involved  with  each  other  that 
Necker  proposed  to  transform  it  into  a  national  bank.  The 
Constituent  Assembly  had  already  assumed  the  power  to 
regulate  the  bank,  as  it  regulated  all  the  established  institu- 
tions of  France,  and  ordered  it  to  pay  into  the  Treasury  80,- 
000,000  livres  of  its  bills  against  a  deposit  of  interest-bearing 
assignats.  The  bank  lost  its  credit  with  the  business  commu- 

1  Noel,  I.,  90. 


BANKING  IN  FRANCE.  43 

nity,  the  redemption  of  its  notes  in  assignats  was  de- 
creed in  1790,  bank-note  issues  were  forbidden  by  the 
law  of  August  17,  1792,  and  the  institution  was  sup- 
pressed by  a  decree  of  the  National  Convention  on  August 

24*  1793- 

The  next  three  years  were  those  of  the  consummation  of 
the  Reign  of  Terror,  the  execution  of  the  King  and  Queen, 
the  fall  of  Danton  and  Robespierre,  and  the  restoration  of 
order  under  the  Directory.  "What  institution  of  credit," 
asks  M.  Horn,  "could  have  braved  the  tempest  which  agi- 
tated the  end  of  the  eighteenth  century  ?  What  instru- 
ment of  credit  could  have  maintained  itself  against  the 
assignats,  which  destroyed  alike  the  notions  of  value  and  of 
money?  "  1  But  the  Saturnalia  of  fiat  money  lasted  but  lit- 
tle longer  than  in  the  time  of  Law.  The  same  sort  of  enact- 
ments,— making  the  paper  money  legal  tender  for  debts  at 
its  nominal  value,  fixing  maximum  prices,  punishing  those 
who  discredited  the  assignats  in  conversation,2  and  inflicting 
the  penalty  of  death  upon  those  who  kept  their  produce  from 
the  market, — quickly  ran  their  course.  The  assignats  in 
circulation  amounted  on  January  i,  1796,  to  27,565,237,396 
francs,  and  had  increased  on  September  7,  to  45,578,810,040 
francs,  when  they  were  worth  one  one-thousandth  part  of 
their  nominal  value.  The  whole  fabric  disappeared  at  a 
blow  when  the  National  Assembly  decreed  on  July  16,  1796, 
that  every  one  might  transact  business  in  whatever  money 
he  chose  and  that  the  mandates,  which  had  superseded  the 
assignats,  should  be  taken  only  at  their  current  value.  The 
effect  of  this  removal  of  the  restrictions  upon  the  natural  laws 
of  money  is  thus  strikingly  portrayed  by  Professor  MacLeod  : 

No  sooner  was  this  great  blow  struck  at  the  paper  currency,  of  mak- 
ing it  pass  at  its  current  value,  than  specie  immediately  reappeared  in 
circulation.  Immense  hoards  came  forth  from  their  hiding  places  ; 
goods  and  commodities  of  all  sorts  being  very  cheap  from  the  anxiety 
of  their  owners  to  possess  money,  caused  immense  sums  to  be  im- 
ported from  foreign  countries.  The  exchanges  immediately  turned 


1  La  Liberte  des  Banques,  317. 

2  Courtois,  99. 


44  HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

in  favor  of  France,  and  in  a  short  time  a  metallic  currency  was 
permanently  restored.  And  during  all  the  terrific  wars  of  Napoleon 
the  metallic  standard  was  always  maintained  at  its  full  value.1 

The  end  of  the  paper  money  phrensy  saw  credit  again 
raising  her  head  and  several  new  banking  institutions  under 
way.  The  first  one,  founded  in  1796,  was  known  as  the 
Caisse  des  Comptes  Courants  (Bank  of  Current  Accounts),  and 
had  a  capital  of  5,000,000  francs  ($1,000,000).  The  circula- 
tion was  20,000,000  francs  in  bills  of  500  and  1000  francs, 
and  bills  of  exchange  running  for  ninety  days  were  dis- 
counted at  six  per  cent.2  The  Caisse  des  Comptes  Courants 
was  created  largely  by  bankers  for  bankers,  and  a  party  of 
business  men,  to  escape  what  they  regarded  as  a  certain  de- 
gree of  favoritism,  determined  to  found  a  banking  associa- 
tion of  their  own.  They  established,  November  24,  1797,  for  a 
term  of  three  years,  the  Caisse  d1  Escompte  du  Commerce  (Bank 
of  Commercial  Discounts),  which  proved  so  successful  that  it 
was  renewed  for  an  unlimited  term.  There  was  no  fixed 
capital,  but  each  new  subscriber  for  a  share  of  10,000  francs 
($2000)  increased  the  capital  by  so  much  until  in  less  than 
four  years  it  had  reached  12,000,000  francs.  Five  thousand 
francs  were  paid  on  each  share  in  cash  and  five  thousand 
francs  in  bank-bills  were  endorsed  by  the  subscriber  with  his 
own  signature  and  afterwards  countersigned  by  the  bank.3 
The  plan  proved  so  successful  that  it  was  imitated  by  the 
retailers,  who  organized  the  Comptoir  Commercial  (Commer- 
cial Bank).  The  Caisse  des  Comptes  Courants  and  the  Caisse 
d'  Escompte  accepted  reciprocally  each  others  bills  and  were 
doing  an  active  and  safe  banking  business  when  a  new  turn 
was  given  to  the  economic  history  of  France  by  the  coup 
d'etat  of  the  Eighteenth  Brumaire  (November  9,  1799),  which 
made  Napoleon  Bonaparte  First  Consul  and  virtually  the 
supreme  ruler  of  France. 

Bonaparte  had  hardly  grasped  power  before  he  turned  to 
his  financial  advisers  for  a  plan  for  a  national  bank.  They 

1  Theory  and  Practice  of  Banking,  II.,  258. 

2  Courtois,  109. 

3  Horn,  322. 


BANKING  IN  FRANCE.  45 

had  one  ready  for  his  immediate  consideration,  bearing  a 
striking  resemblance  to  the  plan  of  the  Notary  Rouen  which 
had  been  before  the  Council  of  Five  Hundred  under  the 
government  of  the  Directory.  Less  than  three  months  after 
the  Eighteenth  Brumaire  appeared  the  decree  of  January  18, 
1800  (28  Nivose,  An  VIII},  constituting  the  Bank  of  France, 
with  a  capital  of  30,000,000  francs  in  shares  of  1000  francs 
each.  The  decree  provided  that  one-sixth  of  the  capital 
should  be  furnished  by  the  Treasury  by  an  investment  of 
half  the  funds  given  as  bonds  by  the  receivers  general,  and 
Napoleon,  members  of  his  family,  and  personal  friends  lent 
their  support  by  subscribing  for  the  shares. l  This  support 
was  necessary  to  the  success  of  the  bank,  and  it  was  not 
until  1802  that  all  the  shares  were  taken.  Vitality  was 
given  the  institution  by  the  decision  of  the  general  assembly 
of  the  Caisse  des  Comptes  Courants  to  consolidate  with  it  and 
the  transfer  of  their  offices  in  the  Place  des  Victoires.  Febru- 
ary 20,  1800,  the  bank  began  its  operations  as  a  bank  of 
issue  and  of  discount.  It  was  at  the  outset  a  private  insti- 
tution, free  from  government  interference  and  its  right  to 
issue  notes  was  far  from  exclusive. 

But  Bonaparte  did  not  view  with  patience  this  situation. 
"  One  bank  is  easier  to  watch  than  several,"  was  his  com- 
ment, and  after  the  Caisse  d'  Escompte  du  Commerce  had 
refused  to  loan  money  to  the  government,  he  took  vigorous 
measures  to  drive  it  to  the  wall.  The  law  of  April  14,  1803 
(24.  Germinal,  An  XI},  gave  the  Bank  of  France  the  exclu- 
sive privilege  of  issuing  bank-bills  at  Paris,  raised  the  capital 
from  30,000,000  to  45,000,000  francs  and  decreed  that  no 
bank  should  be  established  in  the  departments  without  the 
authority  of  the  government.  The  stockholders  of  the 
Caisse  d1  Escompte  du  Commerce  filed  an  emphatic  protest 
against  the  abrogation  of  their  right  to  issue  notes.  Their 
complaints  did  not  prevent  the  passage  of  the  law,  but  the 

1  Napoleon  took  thirty  shares,  Joseph  Bonaparte  took  one  share, 
Murat  two,  Hortense  Beauharnais  ten,  Duroc  five,  General  Clark,  who 
married  Napoleon's  sister  and  died  in  San  Domingo,  one,  and  Bouri- 
enne,  five. — Noel,  I.,  97,  note. 


46  HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

management  of  the  Bank  of  France  did  what  they  could  to 
prevent  a  crisis  by  fusion  with  existing  banks  of  issue.  A 
consolidation  was  arranged  with  the  Caisse  d'  Escompte  du 
Commerce,  which  turned  over  its  assets  and  received  bills  of 
the  Bank  of  France  in  exchange.  The  shareholders  had  the 
option  of  becoming  shareholders  of  the  Bank  of  France  with 
all  the  privileges  of  the  original  shareholders. 

The  financial  crisis  which  broke  out  upon  the  formation  of 
the  third  coalition  against  France,  after  the  rupture  of  the 
Peace  of  Amiens,  resulted  in  radical  changes  in  the  constitu- 
tion of  the  Bank  of  France.  The  preparations  for  the  cam- 
paign of  Austerlitz  required  large  expenditures  by  the 
government  and  the  syndicate  of  contractors  for  supplies  for 
the  armies  obtained  large  loans  from  the  bank  in  the  form  of 
bills.  The  bills  began  to  be  presented  for  redemption  at  the 
rate  of  two  or  three  million  francs  a  week.  The  coin  reserve 
of  the  bank  was  reduced,  specie  was  demanded  by  the  bank 
in  the  settlement  of  its  balances  with  bankers  in  the  depart- 
ments, and  accommodation  bills  of  exchange  were  largely 
drawn  by  the  contractors  to  obtain  new  loans,  with  the  result 
of  new  note  issues  and  new  demands  for  redemption.  The 
circulation,  which  before  1803  had  never  exceeded  30,000,000 
francs,  surpassed  80,000,000  and  the  bills  began  to  fall  below 
par.  The  council  of  the  regency  limited  redemptions  to  a 
fixed  sum  per  day,  and  in  course  of  time  the  contraction  of 
discounts  and  the  settlement  of  balances  due  the  bank  re- 
established equilibrium.  The  victory  of  Austerlitz  (Decem- 
ber 2,  1805)  assisted  in  restoring  confidence,  and  Napoleon, 
the  morning  after  his  return  to  Paris,  summoned  a  council  to 
discuss  the  crisis  which  had  absorbed  his  thoughts  even  upon 
the  field  of  battle.1 

The  Emperor  was  convinced  that  bad  management  had 
much  to  do  with  the  crisis,  and  within  twenty-four  hours  of 
the  council  M.  Mollien  succeeded  M.  de  Barbe-Marbois  as 
Minister  of  the  Treasury  and  was  charged  with  the  prepara- 
tion of  a  new  plan  of  organization  for  the  bank.  He  recom- 
mended that  the  bank  be  linked  with  the  State  and  that  it 


1  Noel,  I.,  104. 


BANKING  IN  FRANCE.  47 

be  the  only  institution  in  the  country  authorized  to  issue 
credit  paper.  "  The  bank,"  he  declared,  "  does  not  belong 
only  to  its  stockholders ;  it  belongs  also  to  the  State,  since 
the  latter  has  given  it  the  privilege  of  creating  money." 
This  policy  was  very  pleasing  to  the  Emperor  and  was 
promptly  put  in  practice.  The  law  of  April  22,  1806,  in- 
creased the  capital  of  the  bank  from  45,000,000  to  90,000,000 
francs  and  confided  its  direction  to  a  governor  and  two  sub- 
governors  named  by  the  head  of  the  State,  but  paid  by  the 
bank.  The  duration  of  the  privileges  of  the  bank  was 
extended  fifteen  years  beyond  the  date  fixed  by  the  Act  of 
1803,  until  September  24,  1843.  It  was  the  purpose  of  Napo- 
leon to  make  the  bank  national  in  its  operations  as  well  as 
in  name,  and  a  decree  of  May  18,  1808,  gave  the  exclusive 
privilege  of  note  issues  to  the  bank  in  every  town  in  which 
it  established  branches. 

The  fall  of  Napoleon  caused  a  temporary  suspension  of  the 
operations  of  the  bank.  The  council  ordered  the  burning  of 
the  bills  which  were  in  the  vaults  ready  for  issue  and  the 
withdrawal  of  current  accounts  by  depositors.  The  reserves 
fell  to  5,000,000  francs  ($1,000,000)  the  circulation  to  10,- 
000,000  francs  and  current  accounts  to  1,300,000  francs.  The 
prompt  return  of  peace  restored  confidence,  the  circulation 
was  increased  to  70,000,000  francs  and  the  reserves  rose  to 
93,000,000  francs.  The  government  of  the  restoration,  how- 
ever, was  not  especially  friendly  to  the  financial  creation  of 
the  Napoleonic  dynasty.  The  management  of  the  bank 
themselves  were  ready  to  renounce  exclusive  privileges  in 
the  departments,  provided  the  stockholders  were  allowed  to 
resume  the  selection  of  the  governor  and  his  assistants.  This 
project  was  not  accepted  by  the  Chambers,  but  the  branches 
at  Rouen  and  Lyon  were  abandoned  and  were  succeeded  by 
departmental  banks  of  a  type  which  soon  spread  to  the  lead- 
ing cities  of  France.  ^ 

These  departmental  banks  were  entirely  independent  of 
the  Bank  of  France,  and  were  authorized  to  issue  their  own 
notes.  They  accommodated  themselves  to  local  necessities, 
their  officers  were  acquainted  with  local  credits,  their  profits 


48 


HISTORY  OF  MODERN  BANKS  OF  ISSUE. 


augmented,  and  their  operation  contributed  greatly  to  the 
development  of  the  industrial  activity  of  the  nineteenth  cen- 
tury in  France.  Institutions  of  this  sort  were  founded  in 
nine  principal  cities,  and  some  idea  of  the  extent  of  their 
operations  and  of  their  success  may  be  formed  from  the  fol- 
lowing table  of  the  principal  items  of  their  balance  sheets 
for  1847  :' 


BANK. 

MEAN  COIN 
RESERVE. 

MEAN 
DISCOUNTS. 

MEAN 
CIRCULATION. 

DIVIDENDS. 

Francs. 

Francs. 

Francs. 

Per  Cent. 

Rouen, 

4,5OO,OOO 

IO,IOO,OOO 

12,000,000 

14.4 

Nantes, 

1,700,000 

6,400,000 

4,3OO,OOO 

9-7 

Bordeaux, 

I2,6OO,OOO 

I3,9OO,OOO 

20,900,000 

I6.3 

I,  yon, 

10,400,000 

23,100,000 

I9,7OO,OOO 

28.8 

Marseilles, 

6,4OO,OOO 

14,000,000 

16,500,000 

12.9 

Havre, 

I,600,000 

7,OOO,OOO 

4,4OO,OOO 

6.8 

Lille, 

I,8OO,OOO 

5,4OO,OOO 

4,500,000 

9.6 

Toulouse, 

I,6OO,OOO 

2,4OO,OOO 

4,800,000 

11.7 

Orleans, 

1,100,000 

2,600,000 

3,000,000 

ii.  3 

Total, 

41,700,000 

84,900,000 

90,100,000 

This  exhibit  shows  a  circulation  for  these  nine  banks  in 
1847  of  about  $17,500,000  secured  by  a  coin  reserve  of 
$8,000,000,  by  means  of  which  loans  had  been  made  to  the 
amount  of  $18,000,000.  The  large  profits  obtained  by  these 
departmental  banks  (indicated  in  the  table  of  dividends) 
were  reflected  in  the  high  prices  of  their  capital  stock.  The 
shares  all  had  a  par  value  of  loco  francs  ($200),  and  the 
quotations  in  1847  were  :  Bank  of  Rouen,  2650  francs  ; 
Nantes,  I75ofr.  ;  Bordeaux,  2200  fr.  ;  Lyon,  3770  fr.  ;  Mar- 
seilles, 1970  fr.  ;  Havre,  1330  fr.  ;  Lille,  1700  fr.  ;  Toulouse, 
i2oofr.  ;  Orleans,  iSiofr.  The  deposits  were  comparatively 
small,  amounting  at  their  maximum  in  1847  t°  16,800,000 
francs  ($3,250,000).  Deposit  banking  was  almost  unknown 
in  the  smaller  cities  of  France  and  these  departmental  banks 

1  This  table  is  compiled  from  the  appendix  to  Courtois's  Histoire 
des  Banques  en  France,  338-41,  and  is  given  in  round  figures  because 
the  tables  appear  there  in  millions  of  francs,  instead  of  being  fully 
carried  out.  The  same  figures  appear  in  Horn's  La  Liberti  des  Ban- 
ques, 361-64. 


BANKING  IN  FRANCE.  49 

could  never  have  made  substantial  dividends  or  acquired  any 
considerable  volume  of  business  without  the  power  to  trans- 
mute their  assets  into  circulating  notes. 

The  majority  of  the  departmental  banks  were  founded 
between  1835  and  1840, — the  period  when  the  failure  of 
the  Bank  of  France  to  meet  expanding  commercial  needs 
began  to  be  most  keenly  felt.  The  Bank  of  France  was 
generally  regarded  as  an  institution  for  bankers  rather  than 
for  merchants  and  the  latter  obtained  their  discounts  at  the 
bank  through  the  intervention  of  private  discount  houses. 
Many  of  these  houses  suspended  during  the  political  dis- 
turbances pf  1830,  and  it  became  necessary  to  appoint  a  royal 
commission  to  report  upon  the  commercial  and  industrial 
situation  and  "  to  propose  measures  suitable  to  restore  to 
business  transactions  and  the  circulation  their  usual  regular- 
ity." The  proposition  which  became  law  on  October  17, 
1830,  proposed  to  make  loans  directly  from  the  Treasury 
and  fixed  the  amount  at  30,000,000  francs  ($6,000,000).  A 
discount  office  (Comptoir  d' Escompte)  was  established  at  Paris 
with  a  capital  of  1,300,000  francs,  which  it  was  authorized 
to  lend  at  four  per  cent,  on  bills  upon  Paris  and  at  five 
per  cent,  on  those  upon  the  provinces.  Various  amounts 
were  afterwards  added  to  the  capital  and  the  comptoir  was 
continued  with  the  guarantee  of  the  City  of  Paris  until 
September  30,  1832.  The  total  discounts  from  December 
31,  1830,  covered  59,928  pieces  of  commercial  paper  amount- 
ing to  33,191,433  francs.  Similar  offices  were  established 
in  many  of  the  departments  and  contributed  with  the  di- 
rect government  loans  towards  the  accommodation  of  in- 
dustry. The  government  commission  made  loans  in  Paris 
for  periods  of  twelve,  eighteen,  and  twenty- four  months,  dis- 
tributing them  with  some  reference  to  the  number  of  laborers 
employed,  and  assisted  nearly  450  establishments  in  fifty-three 
departments  outside  of  Paris,  employing  more  than  eighty 
thousand  men.1  The  amount  of  these  loans  reported  still 
bad  or  doubtful  in  1870  was  905,312  francs  ($180,000). 

A  similar  device  was  resorted  to  again  after  the  revolution 


1  Courtois,  137-45. 

4 


50  HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

of  1848.  The  country  was  then  emerging  from  the  effects 
of  a  financial  crisis  and  the  discount  houses  had  again  lost 
public  confidence.  The  government  on  this  occasion  sought 
the  co-operation  of  the  business  community  in  establishing 
discount  offices.  They  required  that  a  third  of  the  capital 
be  furnished  by  individuals  or  municipalities,  the  other  two 
thirds  being  represented  by  Treasury  bonds  and  municipal 
obligations.  Some  of  the  offices  received  in  addition  a  loan 
in  specie,  upon  which  they  were  required  to  pay  four  per 
cent,  interest  to  the  Treasury.  Most  of  these  loans  were 
reimbursed  at  the  end  of  two  years  and  several  of  the  dis- 
count offices  afterwards  repaid  the  capital  advanced  by  the 
State  and  became  private  banks.  The  Paris  office  became 
the  Comptoir  d^ Escompte,  which  established  branches  in 
India,  Japan,  and  the  Antilles,1  and  carried  on  some  large 
operations  in  finance.  It  was  wrecked  by  advances  of  130,- 
000,000  francs  to  the  great  copper  syndicate  in  1888,  and  its 
ruin  was  proclaimed  by  the  suicide  of  the  director,  M. 
Denfert-Rochereau,  on  March  5,  1889. 2  The  Bank  of  France 
was  compelled  from  1848  to  1852  to  make  many  renewals 
of  its  discounts,  but  the  amount  thus  outstanding  was  re- 
duced on  December  31,  1856,  to  772,500  francs  ($i 50,000). 3 

The  success  of  the  departmental  banks  was  already  so 
great  before  1840  that  the  Bank  of  France  was  stimulated  to 
avail  itself  again  of  the  right  to  establish  branches  in  the 
leading  cities  of  the  country  and  a  contest  which  has  not  yet 
ended  arose  among  bankers  and  economists  as  to  the  relative 
wisdom  of  granting  a  monopoly  of  note  issues  to  a  single 
institution  or  permitting  such  issues  by  local  banks.  The 
advocates  of  monopoly  won  a  partial  triumph  by  the  Act  of 
June  30,  1840,  which  prolonged  the  privileges  of  the  Bank 
of  France  until  December  31,  1867,  and  declared  that  no 
departmental  bank  should  thenceforth  be  established,  nor 
the  privileges  of  existing  banks  prolonged,  except  by  virtue 
of  a  special  law.  The  ordinance  of  March  2$.  184.1,  which 

1  Courcelle-Senueil,  194. 

2  Jannet,  325-26. 

3  Courtois,  178-187. 


BANKING  IN  FRANCE.  51 

fixed  the  status  of  the  branches,  is  the  law  still  in  force,  and 
gave  to  the  branches  the  exclusive  privilege  of  issuing  notes 
in  the  cities  where  they  were  established.  Even  the  increase 
in  the  number  of  the  departmental  banks  and  in  the  branches 
of  the  Bank  of  France  had  not  been  adequate  to  supply  the 
growing  demand  for  discounts,  and  in  1837  Jacques  Laffitte 
founded  the  Caisse  Generate  du  Commerce  et  de  V  Industrie 
(General  Bank  of  Commerce  and  Industry),1  with  a  capital 
of  15,000,000  francs.  The  absence  of  authority  to  issue 
circulating  notes  was  evaded  by  the  issue  of  bills  payable  to 
order  after  five,  fifteen,  and  thirty  days,  with  interest,  and 
for  three  months  without  interest.  The  bills  payable  after 
five  days  were  the  most  sought  for  and  were  circulated 
with  an  indorsement  in  blank  which  permitted  them  to  pass 
from  hand  to  hand. 

The  overthrow  of  the  government  of  Louis  Philippe  in 
February,  1848,  came  on  the  heels  of  the  financial  crisis  of 
1847,  and  the  combination  of  the  two  events  caused  a  long 
list  of  failures  and  the  general  suspension  of  specie  pay- 
ments by  authority  of  the  provisional  government.  The 
suspension  of  specie  payments  was  accompanied  by  decrees 
giving  forced  legal  tender  character  to  bank-notes,  both  those 
issued  by  the  Bank  of  France  and  those  issued  by  depart- 
mental banks,2  but  legal  tender  circulation  was  given  the 
notes  of  the  departmental  banks  only  within  the  departments 


1  The  Bank  of  France  was  unwilling  that  the  name  Banque  should 
be  assumed  by  any  other  institutions  than  itself  and  the  departmental 
banks.     There  was  no  law  on  the  subject,  as  in  England  and  the 
United  States,  but  the  object  was   attained  by  the  suggestion  that 
cordial  relations  would  not  be  established  with  the  new  institution  if 
it  called  itself  a  bank. — Courtois,  155,  note. 

2  The  opponents  of  monopoly  lay  stress  upon  the  fact  that  the  Bank 
of  France  was  forced  first  to  seek  the  suspension  of  specie  payments, 
and  it  was  not  until  ten  days  later  (March  25,  1848)  that  the  same 
privilege  was  extended  to  the  departmental  banks,  which  had  thus 
far  steadily  met  all  demands.     The  circulation  of  the  Bank  of  France 
was  fixed  by  legal  decree  at  a  maximum  of  350,000,000  francs  ($70,000,- 
ooo)  and  limits  were  fixed  for  each  of  the  departmental  banks,  amount- 
ing to  an  aggregrateof  102,000,000  francs  ($20,400,000). — Horn,  368-70. 


52  HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

in  which  they  were  established.  This  policy,  whether  inten- 
tionally or  not,  paralyzed  the  action  of  the  independent 
banks  and  gave  a  color  of  justification  for  the  decrees  of 
April  27  and  May  2,  1848,  providing  for  the  fusion  of  the 
departmental  banks  with  the  Bank  of  France  and  limiting 
the  issue  of  bills  to  the  central  institution  and  its  branches. 
The  language  of  the  decree  based  the  consolidation  upon  the 
ground  ' '  that  the  bills  of  the  departmental  banks  form  in 
certain  localities  special  monetary  signs,  whose  existence 
injects  a  deplorable  perturbation  into  all  transactions  ;  and 
that  the  essential  interests  of  the  country  imperiously  demand 
that  every  bank-bill  declared  to  be  legal  money  shall  be  able 
to  circulate  equally  in  all  parts  of  the  land."  *  The  govern- 
ment thus  touched  upon  the  weakest  feature  of  the  depart- 
mental system — the  lack  of  interchangeability  of  the  various 
note  issues.  This  was  in  part  the  result  of  the  government's 
own  action  in  limiting  the  legal  tender  quality  of  the  notes, 
but  it  was  also  true  that  there  was  no  association  among  the 
banks  which  might  have  kept  their  notes  in  circulation 
without  the  legal  tender  quality.  2  The  Bank  of  France  was 
given  the  aggregate  circulation  of  the  pre-existing  banks 
and  the  maximum  was  raised  by  decree  of  December  22, 
1849,  to  525,000,000  francs. 

The  fusion  of  the  departmental  banks  with  the  Bank  of 
France  resulted  in  an  increase  of  the  capital  of  the  central 
institution  by  the  exact  amount  of  the  capital  of  the  nine 
departmental  banks.  The  capital  of  the  central  bank  had 
been  reduced  in  1823  by  the  purchase  of  outstanding  shares 
to  67,900,000  francs  and  was  increased  by  the  absorption  of 
the  departmental  banks  to  91,250,000  francs  ($18,000,000). 
So  strongly  did  the  current  of  centralization  run  that  it  was 
proposed  to  unite  the  bank  to  the  public  domain  under  the 
name  of  the  National  Bank  of  France,  but  the  Assembly  was 
unwilling  to  increase  the  distrust  already  felt  in  business 
circles  by  so  radical  a  departure  and  rejected  the  proposals.8 

1  Lois  et  Statuts,  67-68. 

2  Courtois,  175-6. 
3 Noel,  I.,  114. 


BANKING  IN  FRANCE.  53 

The  forced  legal  tender  of  the  bills  came  to  an  end  by  the 
law  of  August  6,  1850.  A  new  increase  of  capital  was  made 
by  the  law  of  the  Empire  of  June  9,  1857,  and  the  charter  of 
the  bank  was  extended  to  December  31,  1897.  *ts  existing 
privileges  were  confirmed  and  a  concession  was  made  to  the 
recent  growth  of  economic  opinion,  in  favor  of  controlling 
the  foreign  exchanges  through  the  discount  rate,  by  exempt- 
ing the  bank  from  the  usury  laws.1  The  new  charter  re- 
quired that  branches  be  established  within  ten  years  in  all 
the  departments,  but  it  was  not  until  fifteen  years  after  the 
time  set  that  this  requirement  was  fully  complied  with.  The 
increase  of  capital  was  justified  by  the  immense  expansion 
of  industry  by  machinery  and  the  building  of  railroads,  and 
the  requirement  of  a  branch  in  every  department  made  it  the 
more  imperative.  The  capital  was  therefore  doubled  and 
the  91,250  new  shares  were  issued  at  uoo  francs,  of  which 
the  premium  of  100  francs  was  destined  to  strengthen  the 
reserve.  The  government  borrowed  100,000,000  francs  of 
the  money  subscribed  for  the  increase  of  capital  upon  a 
pledge  of  three  per  cent,  securities. 

The  strength  of  the  bank  proved  a  powerful  support  for 
the  railway  enterprises  which  were  now  being  floated  in 
nearly  every  department.  The  quotation  of  the  stock  of  the 
new  companies,  which  had  not  yet  had  time  to  complete 
their  lines,  had  fallen  very  low  when  ten  of  the  leading  com- 
panies formed  a  syndicate  and  appealed  to  the  bank  for 
assistance.  A  contract  was  signed  by  which  the  bank 
opened  a  credit  in  favor  of  the  companies  on  the  deposit  of 
their  obligations  and  agreed  to  market  them  under  favorable 
conditions.  Two  hundred  and  forty  million  of  francs  ($46,- 
300,000)  of  obligations  were  disposed  of,  150,000,000  by 
private  sales  and  90,000,000  by  public  subscription,  during 
1858,  and  the  quotations  were  carried  upward  from  260  francs 
to  290  francs  within  the  year.  The  only  benefit  derived  by 
the  bank  from  this  operation  was  the  interest  on  the  advances 


1  Lois  et  Statuts,  81 .  The  earnings  above  six  per  cent,  were  required 
to  be  carried  to  a  permanent  surplus  fund,  which  stood  for  more  than 
twenty  years  at  8,002,313  francs. 


54  HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

to  the  companies,  which  amounted  to  449,600  francs,  but 
the  operation  was  so  successful  that  sales  through  the 
agency  of  the  bank  were  continued  in  1859  and  the  bank 
charged  a  commission  of  50  centimes  for  each  obligation 
sold,  deriving  a  premium  of  440,000  francs  from  the  transac- 
tion. Similar  operations  were  continued  for  several  years, 
with  handsome  profits  to  the  bank  and  great  benefit  to  the 
railways  in  placing  their  obligations  and  obtaining  the  neces- 
sary capital  for  construction. 

The  history  of  the  Bank  of  France  since  1870  is  deeply 
colored  by  the  national  struggle  with  Germany.  The  bank 
lent  its  support  to  the  government  at  the  outset  ;  it  received 
the  privilege  of  legal  tender  for  its  notes  and  the  suspension 
of  specie  payments  ;  it  suffered  from  the  ravages  of  the 
Commune,  and  it  played  a  large  part  in  the  settlement  of 
the  great  war  indemnity.  The  management  of  the  bank 
was  prudent,  and  its  credit  suffered  but  slight  impairment 
under  the  strain  of  national  disaster  and  civil  discord.  The 
bank  advanced  50,000,000  francs  to  the  government  on  July 
1 8,  1870,  four  days  after  hostilities  were  voted,  secured  by 
Treasury  bonds  running  for  three  months.  Other  advances 
up  to  the  close  of  the  war  carried  the  total  to  1,470,000,000 
francs  ($280,000,000).  The  suspension  of  specie  payments 
was  authorized  on  August  i2th,  with  only  one  dissenting  vote 
in  the  Chamber  of  Deputies.  This  step  was  not  taken  at 
the  request  of  the  bank,  or  because  of  any  severe  pressure 
upon  it  for  gold,  but  with  the  view  of  tying  up  the  gold 
reserve  for  the  benefit  of  the  government  in  case  of  military 
necessity.1 

The  restoration  of  specie  payments  in  1850  had  been  ac- 
companied by  the  removal  of  any  limitation  upon  note 
issues,  which  had  gradually  expanded  with  increasing  com- 
mercial development  to  1,439,000,000  francs  ($275,000,000) 
in  1869.  A  limit  of  1,800,000,000  francs  was  imposed  by 
the  law  of  August  12,  1870,  which  was  raised  two  days  later 
to  2,400,000,000  francs.  Gold  jumped  to  a  premium  of  one 
and  one  half  per  cent.,  but  the  premium  fell  in  a  few  days  to 

« Courtois,  258. 


BANKING  IN  FRANCE.  55 

one  per  cent,  or  even  less  and  did  not  rise  materially,  in 
spite  of  the  disasters  of  the  army,  until  the  great  demand  for 
foreign  exchange  in  paying  the  war  indemnity.  The  pre- 
mium then  rose  as  high  as  two  and  a  half  per  cent  ,  represent- 
ing apparently  one  of  the  few  cases  where  the  price  of  gold  has 
risen  as  the  result  of  a  special  demand  without  affecting  the 
prices  of  commodities  or  the  credit  of  the  paper  circulation. 
The  necessity  of  a  large  circulating  medium  led  to  a  further 
extension  of  the  limit  of  issue  on  December  29,  1871,  to 
2,800,000,000  francs,  and  the  great  loan  of  three  milliards 
was  the  occasion  for  another  extension,  July  15,  1872,  to 
3,200,000,000  francs.  The  law  of  December  29,  1871,  author- 
ized the  issue  of  notes  for  five  francs  and  ten  francs.  The 
limit  of  circulation  was  not  again  raised  until  after  the  re- 
sumption of  specie  payments.  Resumption  was  set  by  the 
law  of  August  3,  1875,  for  the  time  when  the  debt  of  the 
government  to  the  bank  should  be  reduced  to  300,000,000 
francs.  This  condition  was  formally  complied  with  by  a 
payment  to  the  bank  of  10,000,000  francs  on  December  31, 
1877,  but  the  bank  had  already  been  paying  five- franc  pieces 
in  silver  since  November  7,  1873,  and  twenty-franc  gold 
pieces  since  November,  1874.' 

The  Bank  of  France  was  saved  from  complete  destruction 
during  the  reign  of  the  Commune  in  Paris,  in  the  spring  of 
1871,  by  appeasing  with  small  sums  the  appetites  of  the 
hungry  Communist  leaders.  The  latter  first  drew  out  in 
instalments  the  sum  of  9,401,819  francs,  which  was  on  de- 
posit to  the  credit  of  the  City  of  Paris,  and  when  this  was 
exhausted  demanded  several  millions  more.  The*  bank 
yielded  grudgingly  under  the  compulsion  of  force  and  with 
the  approval  of  the  Ministry  of  Finance  at  Versailles.  The 
Communists,  after  the  capture  of  one  of  the  gates  of  Paris 
by  the  regular  army  on  May  22d,  set  fire  to  the  Tuileries  and 
sent  one  of  their  officers  to  the  bank  to  demand  the  imme- 
diate payment  of  700,000  francs  for  the  wages  of  the  National 
Guard.  The  Marquis  de  Plceuc,  the  Assistant  Governor, 
temporized  as  far  as  possible  by  advancing  200,000  francs 

1  Arnaune,  429. 


5 &  HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

and  refusing  the  remainder  upon  the  ground  that  so  large  an 
advance  required  the  consent  of  the  Council  of  Regents  of 
the  bank.  The  refusal  exasperated  the  Communist  leaders, 
who  threatened  to  bring  the  bank  to  terms  by  two  battalions 
and  two  pieces  of  cannon.  The  bank  yielded,  upon  the 
written  demand  of  the  Committee  of  Public  Safety,  endorsed 
by  M.  Jourde,  the  financial  delegate  of  the  Commune,  that 
"  If  this  sum  is  not  delivered,  the  bank  will  be  immediately 
invaded  by  the  Communal  Guard. ' '  '  M.  Jourde  was  obliging 
enough,  when  a  new  demand  was  made  for  500,000  francs 
on  May  23d,  to  deliver  a  receipt  endorsed  with  the  declaration 
that  ' '  The  refusal  of  this  sum  would  involve  the  seizure  of 
the  bank."  The  next  day  the  regular  army  of  Versailles 
was  in  the  heart  of  Paris  and  the  bank  was  safe  from  further 
robbery.  The  advances  on  behalf  of  the  City  of  Paris  were 
recognized  as  a  debt  of  the  city  and  counted  into  the  loan 
for  210,000,000  francs  contracted  with  the  bank  on  August 
30,  1871.  The  bank  was  less  successful  with  the  general 
government  and,  after  a  long  course  of  negotiations,  was 
obliged  to  charge  7,293,383  francs  to  the  account  of  profit 
and  loss.2 

The  Bank  of  France  played  an  important  part  in  the  most 
remarkable  transaction  in  the  history  of  foreign  exchange — 
the  payment  of  the  great  war  indemnity  levied  upon  France 
by  Germany.  A  detailed  account  of  the  process  of  payment 
was  submitted  to  the  National  Assembly  in  1875  by  M.  L,eon 
Say,  and  forms  one  of  the  most  instructive  chapters  of  mod- 
ern financial  history.  The  definitive  treaty  of  peace,  signed 
at  Frankfort  on  May  10,  1871,  called  for  the  payment  by 
France  to  Germany  of  five  milliards  of  francs  ($1,000,000,- 
ooo).  Five  hundred  millions  were  to  be  paid  thirty  days 
after  the  restoration  of  order  in  Paris,  one  thousand  millions 
during  the  year  1871,  five  hundred  millions  on  May  i,  1872, 
and  three  thousand  millions  on  March  2,  1874,  with  five  per 
cent,  interest  on  the  last  payment.  The  framers  of  the 
treaty  appreciated  the  difficulty  of  making  such  an  immense 

1  Noel,  I.,  122. 
*  Noel,  L,  200. 


BANKING  IN  FRANCE.  57 

transfer  of  credit  without  upsetting  the  financial  fabric  of 
Europe  and  provision  was  made  that  payment  might  be 
made  in  gold  or  silver,  in  notes  of  the  banks  of  England, 
Prussia,  Holland,  or  Belgium,  or  in  first  class  bills  of  ex- 
change. Bills  not  payable  in  Germany  were  to  be  valued  at 
their  net  proceeds  after  deducting  the  cost  of  collection.  It 
was  afterwards  agreed  that  the  portion  of  the  Eastern  Rail- 
way of  France  which  was  situated  in  the  ceded  province  of 
Alsace,  and  was  the  property  of  the  French  government, 
should  be  accepted  for  325,000,000  francs  of  the  indemnity, 
and  that  125,000,000  francs  should  be  received  in  notes  of 
the  Bank  of  France. 

Three  things  had  to  be  accomplished  in  order  to  pay  the 
indemnity  within  the  time  set.  The  credits  had  to  be  trans- 
ferred to  the  French  government  by  taxation  or  the  sale  of 
securities  ;  the  proceeds  had  to  be  converted  into  obligations 
acceptable  to  the  German  government  ;  and  these  obligations 
had  to  be  paid  or  transferred  to  the  credit  of  Germany.  The 
first  step  was  taken  by  means  of  an  advance  from  the  Bank 
of  France  and  the  placing  of  public  loans.  The  bank 
advanced  1,530,000,000  francs  ($300,000,000)  to  enable  the 
government  to  meet  promptly  the  two  payments  required 
during  1871.  One  of  the  conditions  of  the  payment  of  the 
indemnity  was  that  German  troops  should  occupy  French 
soil  until  the  payments  were  completed.  M.  Thiers,  the 
president  of  the  new  republic,  determined  to  free  the  coun- 
try from  foreign  occupation  at  the  earliest  possible  moment 
by  anticipating  the  payments.  Two  loans  were  authorized, 
— one  for  2,225,994,045  francs  ($430,000,000)  in  the  summer 
of  1871,  and  one  of  3,498,744,639  francs  ($675,000,000)  in 
the  summer  of  1872.  They  were  subscribed  many  times 
over  and  the  government  thereby  obtained  the  funds  for 
completing  the  payments  and  liberating  French  soil  in  the 
summer  of  1873. 

One  of  the  striking  results  of  this  loan  was  to  bring  from 
the  hoards  of  the  French  peasants  and  small  shop-keepers 
the  gold  and  silver  which  had  been  accumulating  for  genera- 
tions. It  was  the  initiation  of  whole  classes  of  the  French 


58  HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

people  into  dealing  with  negotiable  securities.  The  time 
was  nearly  ripe  in  the  progress  of  modern  financiering  for 
this  change  in  the  habits  of  the  people,  but  it  required  a  loan 
which  appealed  to  their  patriotism  and  carried  a  high  guaran- 
tee of  safety  to  definitely  break  down  the  old  habit  of 
hoarding  and  establish  the  new  habit  of  investment.1  The 
subscriptions  to  the  second  loan  were  934,276,  and  the 
amount  subscribed  was  13,252,455,930  francs  at  Paris,  4,513,- 
445,566  francs  in  the  provinces,  and  26,050,195,054  francs  in 
foreign  countries.  The  foreign  subscriptions,  numbering 
107,612,  were  largely  speculative  and  the  majority  were  made 
by  the  great  financial  houses  as  a  means  of  supporting  their 
correspondents  in  Paris.  The  bulk  of  the  loan  tended 
eventually  into  the  hands  of  Frenchmen.  The  hoards  of 
gold  and  silver  brought  into  the  market  from  the  provincial 
subscribers  went  to  swell  the  monetary  circulation  and 
enabled  the  Bank  of  France  within  a  few  years  to  accumu- 
late a  coin  reserve  nearly  twice  as  large  as  it  had  ever 
before  held.  While  375,000,000  francs  ($73,000,000)  in  gold 
left  the  country  in  the  three  years  1871-73  and  the  reserve  of 
the  Bank  of  France  declined  as  low  in  1871  as  399,000,000 
francs,  the  yellow  metal  came  pouring  back  in  the  next  few 
years,  and  in  1876  the  reserve  of  gold  alone  in  the  bank  stood 
at  1,530,400,000  francs  ($300,000,000). 

Another  striking  feature  of  the  payment  of  the  war  in- 
demnity was  the  development  of  the  use  of  commercial 
credit  for  transferring  funds  from  one  country  to  another. 


1  M.  I/eroy-Beaulieu  computes  an  increase  in  French  fund-holders 
from  550,000  in  1870  to  1,000,000  in  1876,  counting  only  permanent 
investors  and  excluding  speculative  holdings.  This  would  represent 
about  one  in  eight  of  the  heads  of  families  in  France.  The  sales  of 
public  securities  in  the  departments  increased  from  4,299,425  in  1869 
to  24, 272, 094  in  1873. — La  Science  des  Finances,  II.,  220-25.  The  ef- 
fect of  the  popular  subscriptions  may  be  traced  also  in  the  reduction 
of  the  balances  in  the  Caisse  d'jfcpargne  (Savings  Bank)  of  Paris, 
which  fell  from  54,180,747  francs  ($10, 500,000)  on  January  i,  1870,  to 
35,454,124  francs  ($7,000, ooo)on  January  i,  1873,  the  latter  being  the 
lowest  point  reached  since  1850. —  Vide  Bulletin  de  Statistique,  Oct., 
1895,  XXXVIII.,  374-77- 


BANKING  IN  FRANCE.  59 

The  aggregate  payments  consisted  of  only  742,334,079  francs 
($143,000,000)  in  all  forms  of  currency,  including  bank-notes, 
and  4,248,326,374  francs  ($8 20, 000,000)  in  bills  of  exchange. 
The  loss  in  the  monetary  circulation  of  France  was  less  than 
the  sum  of  coin  and  bank-notes,  because  some  of  the  bank- 
notes were  purchased  by  exchange  in  foreign  countries  and 
others  were  German  notes  which  had  drifted  into  France 
with  the  German  army.  The  real  specie  payments  were 
273,003,058  francs  ($52,600,000)  in  French  gold  and  239,- 
291,875  francs  ($46,000,000)  in  French  silver.  The  essential 
work  of  completing  the  payments  was  done  by  the  purchase 
by  the  government  of  bills  of  exchange  drawn  by  French- 
men upon  their  credits  in  every  quarter  of  the  world.  Brit- 
ish bills  were  the  most  plentiful  upon  the  Paris  market  and 
the  heavy  purchases  of  the  French  government  threw  much 
of  the  monetary  stress  upon  England  and  compelled  the 
Bank  of  England  to  maintain  high  discount  rates  all  through 
1872  and  1873.'  The  purchase  by  the  government  of  a  bill 
drawn  by  a  French  merchant  upon  an  English  customer 
permitted  the  transmission  of  the  bill  to  the  German  gov- 
ernment, which  could  then  draw  upon  London  for  the  gold 
or  simply  direct  the  deposit  of  the  proceeds  to  their  credit  in 
the  London  Joint  Stock  Bank,  which  was  their  London 
agent.  If  the  Frenchman  who  sold  his  bill  of  exchange  to 
the  government  was  a  purchaser  of  the  new  public  loan,  the 
result  of  the  process  was  the  transformation  of  his  claim 
against  his  English  customer  into  a  claim  against  his  own 
government. 

One  of  the  incidents  of  this  great  operation  in  exchange 
was  the  fall  in  the  price  of  foreign  securities  on  the  Paris 
market  and  their  flight  to  other  countries,  where  their  quo- 
tations remained  comparatively  undisturbed.  These  influ- 
ences operated  most  directly  upon  what  are  known  on  the 
European  exchanges  as  "international  securities,"  because 
they  are  known  and  quoted  in  the  leading  markets  of  the 
world.  The  cause  of  their  decline  on  the  Paris  market  in 
1871  was  the  eagerness  of  Frenchmen  to  transfer  their  capi- 

1  Gilbart,  II.,  349- 


60  HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

tal  into  the  obligations  of  their  own  country.  The  result 
of  the  decline  was  not  only  the  sale  of  the  securities  offered 
to  brokers,  but  a  flood  of  foreign  money  and  foreign  credits 
to  Paris  to  take  advantage  of  the  reduced  prices  of  ' '  the 
internationals."  M.  Say,  in  his  report,  attributed  to  these 
arbitrage  transactions  in  international  stocks  and  their  cou- 
pons much  of  the  facility  with  which  the  indemnity  was 
paid.  The  sales  of  Italian  five  per  cent,  securities  alone  on 
the  Paris  Bourse  from  July  i,  1871,  to  December  31,  1873, 
were  46,115,000  francs  ($9,000,000),  not  including  sales  by 
private  brokers.  The  proof  that  these  sales  were  largely  on 
foreign  account  was  furnished  by  the  decline  in  the  interest 
payments  made  at  Paris  on  Italian  securities  from  40,150,- 
ooo  francs  on  July  1,1871,  to  25,604,000  francs  on  January 
i,  1874.' 

The  Bank  of  France  was  embarrassed  as  early  as  1860  by 
the  fluctuations  in  the  relative  value  of  gold  and  silver  and 
their  departure  from  the  ratio  of  fifteen  and  a  half  to  one 
fixed  by  the  French  coinage  law  of  1803.  Silver  had  be- 
come the  more  valuable  metal,  because  of  the  immense  addi- 
tion to  the  gold  stock  by  the  discoveries  in  California  and 
Australia.  The  value  of  silver,  in  other  words,  was  greater 
in  proportion  to  gold  than  the  price  paid  for  bullion  at  the 
mint.  It  was  obvious  that  if  the  bank  continued  the  policy 
of  redemption  of  its  notes  in  gold  or  silver  at  the  option  of 
the  holder,  silver  coin  would  always  be  preferred,  and  would 
be  withdrawn  for  speculative  purposes  as  long  as  it  could  be 
obtained,  because  it  could  be  sold  as  bullion  at  a  profit  above 
its  face  value  in  gold.  The  situation  became  so  serious  that 
the  bank  asserted  the  option  to  pay  only  in  gold  and  was 
obliged  to  borrow  that  metal  from  the  Bank  of  England  in 
order  to  be  well  supplied.  Gold  had  been  flowing  into 
France  since  the  opening  of  the  California  mines  and  silver 

1  Leroy-Beaulieu,  II.,  236.  M.  L,eroy-Beaulieu  admits  that  sales  for 
report  are  included  in  the  first  item,  but  the  decline  in  interest  pay- 
ments at  Paris  seems  to  sustain  his  argument  that  Italian  securities 
left  France  in  order  that  their  proceeds  might  be  invested  in  the  in- 
demnity loan. 


BANKING  IN  FRANCE.  6 1 

flowing  out  in  an  uninterrupted  stream,1  but  the  Bank  of 
France  had  held  on  to  the  dearer  metal,  silver,  and  redeemed 
in  the  cheaper  until  its  gold  reserve  was  reduced  in  1860  to 
about  100,000,000  francs,  while  its  silver  stood  at  about  325,- 
000,000  francs.  About  ,£2, 000,000  in  gold  was  obtained  from 
the  Bank  of  England,  which  was  not  averse  to  exchanging 
the  less  valuable  metal  for  the  dearer,  even  though  the  latter 
was  not  a  money  metal  in  England. 

The  departure  of  the  market  ratio  of  gold  and  silver  from 
the  mint  ratio  by  the  depreciation  of  gold  was  the  occasion 
of  the  formation  of  the  L,atm  Union.  Belgium,  Italy,  and 
Switzerland  had  already  adopted  the  French  decimal  system 
of  coinage  before  the  formation  of  the  Union,  and  the  coins 
of  each  country  circulated  freely  in  the  others.  The  proposi- 
tion for  a  conference  came  from  Belgium,  but  was  cordially 
accepted  by  the  French  government  and  the  meeting  called 
at  Paris.  The  most  pressing  problem  to  be  confronted  was 
the  disappearance  of  the  subsidiary  silver  coins  because  of 
the  premium  upon  silver.  Switzerland  had  already  reduced 
her  silver  coins,  except  the  five- franc  piece,  by  the  law  of 
January  31,  1860,  from  nine-tenths  fine  to  eight-tenths; 
Italy,  by  the  law  of  August  24,  1862,  had  lowered  to  0.835 
fine  the  franc  and  smaller  pieces  ;  and  France  had  adopted 
the  standard  of  0.835  for  her  pieces  of  20  and  50  centimes. 
The  change  of  all  but  the  five- franc  piece  was  recommended 
by  a  commission  appointed  by  the  French  government  in 
1861,  but  the  Corps  Legislatif  in  passing  the  law  of  May  25, 
1864,  refused  to  reduce  the  one-  and  two-franc  pieces.2  Bel- 
gium was  on  the  point  of  taking  legislative  action  when  the 
advantages  of  an  international  conference  suggested  them- 
selves. 

The  refusal  of  the  French  legislative  body  to  reduce  the 
fineness  of  the  larger  silver  pieces,  so  as  to  bring  their  bullion 

1  The  net  imports  of  gold  into  France  from  1848  to  1870  were  5,153,- 
000,000  francs  ($  1,000,000,000)  and  only  one  year  (1861)  showed  net 
exports.     The  years  1852  to  1864  showed  uninterrupted  net  exports  of 
silver  amounting  to  1,726,000,000  francs  (1340,000,000). — Shaw,  184-86. 

2  Arnaune",  227. 


62  HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

value  down  to  their  face  value,  was  rapidly  driving  them  out 
of  circulation  and  silver  had  long  ceased  to  be  offered  in  any 
considerable  quantities  for  coinage  at  the  mints.1  The  con- 
ference decided  that  all  silver  coins  below  the  five-franc  piece 
should  be  reduced  to  0.835  fine>  that  their  coinage  should  be 
limited  in  each  country  to  six  francs  per  capita,  that  the  sub- 
sidiary silver  should  be  received  in  the  public  depositaries  of 
each  country  in  amounts  not  exceeding  one  hundred  francs 
($19. 30)  and  should  be  a  legal  tender  in  the  country  where 
coined  in  amounts  of  not  more  than  fifty  francs  ($9.65).  The 
Belgian,  Swiss,  and  Italian  delegates  strongly  urged  the  adop- 
tion of  the  single  gold  standard,  but  the  proposition  was  re- 
sisted by  the  French  delegates  and  was  not  acted  upon.  The 
convention  putting  in  effect  the  decisions  reached  in  the  con- 
ference was  adopted  on  December  23,  1865,  and  Greece  soon 
after  became  a  party  to  it.  A  monetary  conference  was  held  at 
Paris  in  connection  with  the  international  exposition,  which 
recommended  the  adoption  of  the  gold  standard  by  the  coun- 
tries taking  part,  and  it  was  in  pursuance  of  this  action  that 
the  French  government  concluded  the  preliminary  conven- 
tion of  July  31,  1867,  with  Austria,  establishing  a  fixed  rela- 
tion between  the  franc  and  the  gold  florin.2 

The  formation  of  the  Latin  Union,  so  generally  treated  to- 
day as  a  plan  to  maintain  bimetallism,  was,  in  the  language 
of  a  high  authority,  "  a  measure  of  defence  against  the  ac- 
tion of  the  bimetallic  system  in  those  countries  which  had 
adopted  the  monetary  system  of  France,  and  lay  exposed  to 
all  its  disastrous  fluctuations."  The  effect  of  the  action  of 
the  countries  forming  the  Union,  in  the  language  of  the 
French  monetary  commission  of  1867,  "places  in  the  front 
rank  gold  money,  and  reduces  the  pieces  of  silver  of  two 
francs  and  less  to  the  r61e  of  token  money.  It  therefore 


1  The  total  coinage  of  silver  at  the  French  mint  in  1863  was  329,610 
francs  ($65,000),  while  the  gold  coinage  was  210,230,640  francs  ($41,- 
000,000).     The  largest  silver  coinage  since  1856  had  been  8,663,568 
francs  in  1858,  and  the  largest  gold  coinage  702,697,790  francs  in  1859. 

2  Vide  Ch.  viii.  and  ix. 

3  Shaw,  190 


BANKING  IN  FRANCE.  63 

definitely  determines  the  ascendency  of  the  gold  franc  and 
solves  practical  difficulties  arising  from  the  double  stand- 
ard." The  Latin  Union,  so  far  from  establishing  bimetal- 
lism, adopted  the  gold  franc  as  the  standard  because  gold 
was  then  the  money  of  general  circulation  within  the  coun- 
tries of  the  Union.  The  mints  continued  open  to  the  free 
coinage  of  both  metals,  but  silver  was  not  offered  on  private 
account  for  coinage  into  five-franc  pieces  at  the  legal  ratio, 
any  more  than  gold  would  be  offered  at  the  present  day  in  a 
country  where  silver  at  the  old  ratio  was  the  common  medium 
of  circulation. 

It  was  because  the  ratio  tilted  backwards  to  a  higher  bul- 
lion value  for  gold  and  a  declining  value  for  silver  that  the 
aspect  of  the  monetary  problem  was  reversed  and  that  the 
purpose  of  the  Latin  Union  has  come  to  be  misunderstood. 
The  members  of  the  union  from  the  outset,  however,  have 
done  no  more  than  seek  to  maintain  the  circulation  of  silver 
by  limiting  its  coinage.  Silver  first  dropped  below  par  in 
1867,  when  the  commercial  ratio  of  gold  to  silver  was  i  to 
15.57,  but  it  was  not  until  1873,  when  the  quotation  was 
i  to  15.92,'  that  it  began  to  be  noticed  that  an  excessive  quan- 
tity of  silver  was  being  minted  and  that  gold  was  disappear- 
ing from  circulation.  The  problem  was  complicated  by  the 
fact  that  France,  Italy,  and  Greece  were  under  the  regime 
of  paper  money,  leaving  only  Belgium  and  Switzerland  in 
full  enjoyment  of  the  bimetallic  coinage  system.  The  latter 


1  The  statement  of  these  differences  in  the  terms  of  the  ratio  makes 
them  look  much  more  trifling  than  is  really  the  case.  Stated  in  terms 
of  percentage,  the  depreciation  of  silver  in  1867  was  a  little  less  than 
one-half  of  one  per  cent.  (0.45)  and  in  1873  was  2.7  per  cent,  of  the  par 
value.  The  depreciation  in  1872  was  0.97  per  cent.  It  is  interesting 
to  note  that  the  changes  prior  to  1873  took  place,  and  that  their  effect 
was  visible  in  the  bullion  offerings  at  the  mints,  before  the  adoption 
of  the  gold  standard  in  Germany  or  the  United  States  or  the  limitation 
of  coinage  by  the  Latin  Union.  The  depreciation  of  nearly  one  per 
cent,  in  1872  was  sufficient  to  afford  a  large  profit  on  bullion  operations, 
in  view  of  the  fact  that  the  usual  element  in  such  computations — 
the  time  consumed  in  earning  interest — did  not  need  to  be  considered. 


64  HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

country,  with  a  keen  appreciation  of  actual  conditions, 
almost  entirely  suspended  silver  coinage  and  received  her 
circulation  from  the  other  countries  of  the  union.1  The 
presentation  of  gold  for  coinage  at  the  French  mints  ceased 
during  1872  and  1873,  and  the  silver  coinage  was  26,838,369 
francs  in  the  former  and  156,270, 160  francs  in  the  latter  year. 
The  mint  of  Belgium  was  besieged  by  the  owners  of  silver 
bullion  and  111,000,000  francs  in  five-franc  pieces  were 
coined  in  1873,  while  even  Italy,  though  on  a  paper  basis, 
coined  42,000,000  lires,  which  were  refused  acceptance  by 
the  Bank  of  France.3 

The  limitation  of  the  coinage  was  resorted  to  for  the  four 
years  ending  with  1877  as  the  only  means  of  averting  the 
single  silver  standard.  Conferences  were  held  annually  and 
the  maximum  coinage  of  five-franc  pieces  was  fixed  for  each 
country.  The  aggregate  of  these  allowances  for  the  four 
years  was  45,200,000  francs  for  Belgium,  216,000,000  francs 
for  France,  18,000,000  francs  for  Greece,  164,000,000  francs 
for  Italy,  and  28,800,000  francs  for  Switzerland.  Italy  was 
allowed  to  coin  29,000,000  francs  in  1878  and  1879,  on  condi- 
tion that  the  sum  should  be  retained  in  the  Bank  of  Italy  as 
a  metallic  reserve  against  the  circulating  paper  money. 
Silver  continued  to  fall  in  price  and  the  policy  of  limitation 
was  succeeded  in  1878  by  the  policy  of  absolute  suspension 
of  the  coinage  of  five-franc  pieces.  The  monetary  union 
was  renewed  from  1878  to  January  i,  1886,  and  was  ex- 
tended in  1885  to  January  i,  1891,  since  when  it  has 
been  prolonged  annually  by  mutual  agreement.  The  con- 
vention of  1885  not  only  bound  each  of  the  contracting 
parties  not  to  resume  the  coinage  of  five-franc  pieces  without 
the  consent  of  the  union,  but  provided  that  if  such  coinage 
should  be  resumed  the  coins  should  be  redeemable  by  the 
nation  coining  them  in  gold  on  demand,  and  that  if  such 


1  Her  entire  coinage  of  five-franc  pieces,  from  the  first  limitation 
to  the  final  suspension  of  silver  coinage,  was  only  7,978,000  francs 
($1,500,000).— Haupt,  85-86. 

2  Arnaune,  231. 


BANKING  IN  FRANCE.  65 

redemption  should  be  refused  the  coins  might  be  refused  by 
the  public  depositaries  of  the  other  parties  to  the  union.1 

It  was  such  conditions  which  confronted  the  Bank  of 
France  when  it  prepared  to  resume  specie  payments  in  1877 
with  a  gold  reserve  of  1,202,400,000  francs  ($232,000,000)  and 
a  silver  reserve  of  860,900,000  francs  ($165,000,000).  The 
situation  was  exactly  'the  same  as  in  1860,  except  that  the 
position  of  the  two  metals  was  reversed.  The  bank  found 
itself  well  stocked  with  the  more  valuable  metal,  but  re- 
strained from  using  it  for  redemption  purposes  because  of 
the  certainty  that  it  would  soon  be  drawn  away  and  sold  as 
bullion.  The  policy  was  adopted,  and  has  been  steadily 
adhered  to,  of  redeeming  in  gold  or  silver  at  the  discretion 
of  the  bank  and  charging  a  premium  for  gold.  It  is  impos- 
sible to  obtain  gold  at  the  bank  in  the  quantity  desired  for 
exportation  and  it  has  to  be  taken  from  the  domestic  circu- 
lation. This  means  of  protecting  its  gold  reserve  has  been 
treated  by  the  bank  in  some  measure  as  a  substitute  for  rais- 
ing the  rate  of  discount  in  a  monetary  pressure  and  while  it 
protects  the  gold  of  the  bank  it  has  none  of  the  advantages 
upon  the  money  market  which  follow  the  different  policy  of  the 
Bank  of  England .  The  bullion  shippers  were  shrewd  enough 
when  discount  was  low  and  gold  at  a  premium  in  1857,  to 
draw  gold  by  discounting  accommodation  bills  at  the  bank 
rate  of  four  per  cent,  and  selling  the  gold  for  the  premium 
for  exportation.  The  bank  prevents  this  under  its  present 
practice  by  paying  for  discounted  paper  in  silver,  which  is 
not  exportable  for  monetary  purposes.  The  result, — "to 
defend  the  reserve  of  the  bank  to  the  detriment  of  the  reserve 
of  the  country,"  in  the  language  of  M.  Arnaune — "is  an 
error  which  may  have  melancholy  consequences."  2 

The  excessive  quantity  of  silver  in  the  reserve  of  the  bank 
has  contributed  in  a  measure  to  its  large  note  circulation. 
The  bank  has  tried  to  force  silver  five-franc  pieces  into  cir- 

1  For  the  arrangements  regarding  the  liquidation  in  gold  of  the 
excess  of  foreign  silver  coins  in  France,  see  Chapter  xi.,  under  the 
Bank  of  Belgium. 

*  La  Monnaie,  le  CMit,  etle  Change,  492. 


66  HISTORY  OF  MODERN  BANKS  Of  ISSUE. 

culation,  but  they  have  drifted  as  steadily  back  upon  its 
hands  as  standard  silver  dollars,  in  spite  of  the  efforts  of 
Treasurer  Jordan,  drifted  back  into  the  Treasury  of  the 
United  States  in  1885  and  1886.  People  have  preferred  to 
take  notes  resting  upon  the  security  of  both  the  gold  and 
silver  in  the  bank  reserves.  The  bank,  in  the  language  of 
an  eminent  Scotch  financier,  has  had'to  "  relieve  the  public 
°f  ^50,000,000  of  silver,  which  was  coined,  and  was  in  ex- 
cess of  the  silver  required  for  the  purposes  of  the  people."1 
The  government  proposed  the  removal  of  the  limit  on  circu- 
lation in  1884  and  while  this  was  refused,  the  maximum  was 
carried  up  by  the  law  of  January  30,  1884,  from  3,200,000,000 
francs  to  3,500,000,000  francs.  The  actual  circulation  at 
this  time  was  3,162,000,000  francs,  but  it  continued  to  rise 
in  response  to  the  demand  of  the  public  for  notes.  The  ex- 
cess of  notes  in  circulation  over  gold  and  silver  was  1,210,- 
ooo  francs  in  1884  and  was  reduced  in  1893  to  695,000,000 
francs,  while  the  circulation  had  climbed  upwards  on  Jan- 
uary 12,  1893,  to  3,473,000,000  francs.  Another  extension 
of  the  legal  limit  was  demanded  for  the  accommodation  of 
commerce  and  it  was  carried  upward  by  the  law  of  January 
25,  1893,  to  4,000,000,000  francs.  It  was  found  necessary 
in  the  extension  of  the  charter  in  1897  to  advance  the  limit 
to  5,000,000,000  francs  and  again  by  a  law  of  February  9, 
1906,  to  5,800,000,000  francs.2 

The  Bank  of  France  faced  a  serious  problem  at  the  close 
of  the  nineteenth  century  in  the  struggle  over  the  renewal  of 
its  charter.  The  renewal  was  proposed  in  1891,  but  the 
opposition  was  so  strong  in  the  Chambers  that  the  bill  for 
the  purpose  was  withdrawn  by  the  ministry  for  fear  of  defeat. 
The  bank  then  pursued  a  Fabian  policy,  awaiting  the  near 
approach  of  the  expiration  of  the  charter  at  the  close  of  1897, 
in  the  apparent  belief  that  opposition  would  be  silenced  in 


1  Mr.  Charles  Gairdner,  manager  of  the  Union  Bank  of  Scotland, 
before  the  Indian   Currency   Committee.     Sen.    Misc.   Doc.  23,  52d 
Cong.,  ist  Sess.,  150. 

2  Bulletin  de  Statistique,  February,  1906,  UX.,  119. 


BA  NX  ING  IX  FRANCE.  6? 

a  measure  by  the  lack  of  time  for  framing  a  workable  project 
for  a  new  institution.  The  new  charter  was  laid  before  the 
Chamber  of  Deputies  on  October  31,  1896,  and  was  referred 
to  a  committee  of  twenty-two  for  examination.  This  com- 
mittee did  not  report  until  winter  and  their  report  was  not 
taken  up  for  consideration  in  the  Chamber  until  May  15, 
1897.  The  °ill  passed  the  Chamber  on  July  i,  by  a  vote  of 
419  to  97, '  and  went  to  the  Senate,  where  it  was  passed  at 
the  October  session  and  became  a  law  on  November  17,  1897. 
The  vote  upon  the  passage  of  the  bill  in  the  Chamber  of 
Deputies  did  not  indicate  the  full  strength  of  the  opposition 
to  the  charter.  The  proposition  to  convert  the  bank  into  a 
state  institution  was  rejected  by  a  vote  of  118  to  422,  but  the 
proposition  that  the  bank  should  provide  capital  for  an  agri- 
cultural bank  to  the  amount  of  60,000,000  francs  was  rejected 
only  by  a  vote  of  287  against  258. 

The  new  charter,  which  was  not  greatly  changed  from  the 
form  in  which  it  was  submitted  by  the  government,  extended 
the  privileges  of  the  bank  until  December  31,  1920,  subject 
to  the  power  of  termination  by  the  Chambers  on  December 
31,  1912,  if  they  should  see  fit  to  so  vote  during  the  year 
1911.  The  essential  features  of  the  old  charter  were  not 
changed,  but  the  limit  of  circulation  was  increased  to  5,000,- 
000,000  francs,  the  bank  renounced  interest  upon  two  exist- 
ing loans  to  the  government  amounting  to  140,000,000  francs, 
and  made  a  further  advance  to  the  government  of  40,000,000 
francs  free  of  interest.  These  renunciations  of  interest  are 
offset  by  the  fact  that  the  government  carries  in  its  current 
account  at  the  bank  a  sum  which  is  usually  equal  to  the 
amount  of  these  loans.  The  bank  was  required  to  create  at 
least  one  new  auxiliary  bureau  each  year  up  to  the  number 
of  fifteen.  The  most  important  of  the  new  obligations  im- 
posed upon  the  bank  was  the  payment  of  a  tax  equal  to 
one-eighth  of  the  rate  of  discount  upon  that  portion  of  the 
circulation  which  exceeds  the  metallic  reserve.  This  tax 


1  J&conomiste  Europeen,  July  2,  1897,  XII.,  15. 


68  HIS  TOR  Y  OF  MODERN  BA  NKS  OF  ISSUE. 

was  never  to  be  less  than  2,000,000  francs  ($400,000)  per 
year. ' 

The  Bank  of  France  enjoys  the  advantage  of  an  owner- 
ship and  credit  independent  of  that  of  the  government,  in 
spite  of  the  close  official  supervision  which  is  exercised  over 
it.  This  financial  independence  proved  as  useful  to  the 
country  midst  national  disasters  and  changes  of  government 
in  1870-71  as  dependence  upon  the  government  proved 
dangerous  during  the  similar  changes  of  1814-15.  The  bank 
was  able  to  assist  the  government  by  advances  when  its  own 
arms  were  paralyzed.2  None  of  the  182,500,000  francs  of 
the  bank  capital  are  owned  by  the  State,  but  the  government 
since  1806  has  had  a  share  in  the  management  through  the 
appointment  of  the  governor  and  two  deputy  governors, 
removable  at  the  will  of  the  Minister  of  Finance.  The  bank 
receives  the  public  monies  on  deposit  and  performs  other 
public  services  free  of  charge,  but  does  not  act  as  an  agent 
of  the  State  to  the  same  extent  as  many  other  European 
banks.  By  the  charter  of  1897,  the  duty  was  imposed  upon 
the  bank  of  paying  coupons  of  the  public  debt  and  issuing 
new  loans.8 

The  governing  board  of  the  bank  is  a  general  council, 
which  consists  of  fifteen  regents  and  three  inspectors  or 
auditors  (censeurs).  The  members  are  elected  at  a  general 
meeting  of  the  stockholders,  but  three  of  the  regents  must 
be  selected  from  the  treasury  disbursing  agents,  and  three 
inspectors  and  five  regents  must  be  chosen  from  among  the 
business  portion  of  the  shareholders.4  The  only  share- 
holders entitled  to  participate  in  the  annual  meetings  in 
January  are  the  two  hundred  who  hold  the  largest  number 
of  shares,  and  at  the  present  value  of  the  shares  no  share- 
holder worth  much  less  than  500,000  francs  ($100,000)  is  able 

1  Bulletin  de  Statistique,  December,  1897,  XLIL,  582. 

2  Noel,  I.,  240.     M.  Thiers  summed  up  one  of  the  lessons  of  sound 
banking  in  a  sentence:  "The  bank  saved  us  because  it  was  not  a 
bank  of  state." 

a  Pommier,  329. 

4  Lois  et  Statuts,  Art.  9,  loi  du  22  Avril,  1806. 


BANKING  IN  FRANCE.  69 

to  participate. l  A  full  statement  of  operations  is  furnished  by 
the  bank  to  the  government  every  six  months  and  a  balance 
sheet  is  published  in  the  official  journal  every  Friday. 

The  governor  and  deputy  governors  of  the  bank  are  the 
direct  representatives  of  the  State,  and  most  of  the  measures 
taken  by  the  bank  are  taken  on  their  initiative.  It  is  from 
them  that  proposals  usually  come  for  raising  or  lowering  the 
rate  of  interest.  It  was  declared  by  M.  Rouland,  who  was 
governor  at  the  time  of  the  official  inquiry  of  1865,  that 
' '  nothing  of  any  description  which  concerns  the  great  inter- 
est of  the  public,  nothing  which  concerns  the  larger  duties 
which  the  bank  has  to  perform  towards  commerce  and  in- 
dustry,— nothing  of  all  that  class  of  business  is  left  to  the 
discretion  of  what  is  called  the  interested  party."  He  inti- 
mated that  it  had  not  perhaps  happened  twice  in  sixty-two 
years  that  the  proposal  to  change  the  rate  of  discount  had 
come  from  the  council.2  The  bank  has  had  only  thirteen 
governors  since  1806,  several  of  these  serving  only  ad  interim. 

The  most  important  functions  of  the  Bank  of  France  con- 
cern the  issue  of  bank-notes.  This  is  plain  from  the  fact 
that  of  its  liabilities  of  6,987,955,990  francs  at  the  close  of 
1913,  the  sum  of  5,713,551,290  francs  represented  outstand- 
ing notes,  while  on  the  other  side  of  the  account  the  assets 
included  coin  and  bullion  to  the  amount  of  4,157,454,629 

iNeymarck,  15.  This  provision  has  been  the  subject  of  much 
criticism  in  connection  with  the  renewal  of  the  charter  and  it  has  been 
pointed  out  that  the  bank  is  the  only  one  of  the  great  European 
institutions  where  the  number  entitled  to  vote  in  the  general  meet- 
ings of  the  shareholders  is  thus  definitely  limited.  A  minimum  num- 
ber of  shares  is  the  usual  qualification,  being  only  one  in  the  Imperial 
Bank  of  Germany,  five  in  Holland  and  Servia,  ten  in  Belgium,  fifteen 
in  Italy,  twenty  in  Austria-Hungary,  and  fifty  in  Spain. — Noel,  I.,  222. 

*  Palgrave,  147.  It  is  declared  by  Fachan  that  this  mixed  system 
gives  satisfaction  both  to  those  who  wish  to  withdraw  from  the  manip- 
ulations of  the  State  the  accumulated  resources  of  a  private  bank, 
constituting  individual  property,  and  those  who  believe  that  the  right 
to  issue  notes  is  so  dangerous  that  the  manner  of  its  use  and  the  pre- 
vention of  abuses  of  it  should  be  under  state  regulation. — Historique 
de  la  Rente  Franfaise,  259. 


70  HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

francs.  Commercial  paper  represented  only  1,526,383,115 
francs  and  advances  on  securities  742,442,772  francs.  To  a 
large  extent  the  function  of  the  bank  is  that  of  rediscount 
It  performs  this  function  even  for  paper  representing  very 
small  transactions  and  has  in  this  field  done  much  to  benefit 
small  producers  and  shop-keepers.  Thus  during  the  year 
1913,  at  Paris  alone,  the  number  of  pieces  of  paper  discounted 
by  the  bank  was  9,056,424,  and  of  these  4,563,306  were  for 
loo  francs  ($19.30)  or  less.  The  number  of  pieces  for  these 
small  amounts  discounted  at  Paris  in  1881  was  1,160,495; 
in  1894,  2>I88,957;  and  in  1907,  3,646,229.  The  total  number 
of  pieces  discounted  at  all  offices  was  30,041,247.  The 
average  maturity  of  paper  discounted,  which  in  1912  was 
25.45  days,  rose  in  1913  to  30  days.1 

The  discounts  given  in  the  following  table  of  the  principal 
items  of  the  bank's  accounts,  from  the  official  reports  to  the 
government,  represent  the  aggregate  of  the  bills  discounted 
during  the  year  rather  than  the  amount  outstanding  on  any 
given  date : 


YEAR. 

MEAN 
CIRCULATION. 

MEAN  METALLIC 
RESERVE. 

TOTAL 
DISCOUNTS. 

MEAN   DISCOUNT 
RATE. 

(In  millions  of  francs) 

1845 

268.8 

271.2 

1,399-3 

4.OO 

1848 

347-8 

176.2 

1,537-4 

4.OO 

1850 

495-5 

457-8 

1,171.0 

4.OO 

1855 

644.4 

340.5 

3,765.2 

4-44 

1860 

736.4 

5I3.5 

9,964.7 

3.63 

1865 

843.8 

439-6 

6,O3O.2 

3-72 

1870 

1,566.4 

1,130.7 

6,627.3 

3-99 

1875 

2,464.9 

i,54i-i 

6,826.7 

4.00 

1880 

2,311-4 

1,974-4 

8,696.8 

2.81 

1885 

2,891.6 

2,150.7 

9,250.1 

3.00 

1890 

3,076.6 

2,476.7 

9,549-7 

3.00 

1892 

3,186.3 

2,785.3 

8,415.7 

2.50 

1893 

3,423.0 

2,895.3 

8,922.2 

2.50 

1894 

3,495-0 

3,127.7 

8,725.6 

2.50 

18952 

3,473-0 

3,184.9 

8,621.9 

2.  2O 

1896 

3,629.0 

3,139.5 

9,924.6 

2.0O 

AssembUe  Generate  des  Actionnaires,  1914.  I3- 
•From    1895   the  figures  of  the   metallic  reserve,  instead  of  the 
mean,  are  the  figures  of  the  end  of  the  year,  as  better  representing 
the  progression  from  year  to  year. 


BANKING  IN  FRANCE. 


YEAR. 

MEAN 
CIRCULATION. 

MEAN  METALLIC 
RESERVE. 

TOTAL 
DISCOUNTS. 

MEAN    DISCOUN^ 
RATE. 

(In  millions  of  francs) 

I898 

3.742.0 

3,023-9 

II,O32.O 

2.  2O 

1900 

4.034-1 

3,433-8 

12,247.5 

3-23 

1902 

4,l62.0 

3,650.3 

9,555-8 

3-00 

1903 
I9°5 

4,310.0 
4,408.2 

3,486.0 
3,975-6 

11,684.9 
10,967.5 

3-00 
3.00 

1907 

4,800.4 

3,615-3 

15,769.1 

3-45 

1910 

5,197.7 

4,262.0 

14,580.7 

3-oo 

1913 

5,665.3 

3,972.1 

20,005.6 

4.00 

The  discount  policy  of  the  Bank  of  France  has  been  as 
conservative  as  its  administrative  policy.  While  the  average 
rate  has  been  very  close  to  that  of  the  Bank  of  England,  or 
about  3.60  per  cent,  from  1844  to  1900,  the  changes  have 
been  much  less  frequent  and  advances  in  the  rate  have  been 
much  less  radical  in  periods  of  stringency.  During  the 
period  from  1844  to  I9°°.  tne  Bank  of  England  altered  its 
rate  four  hundred  times ;  the  Bank  of  France  altered  its  rate 
in  times.  Nor  has  the  tendency  of  recent  years  been  less 
favorable  to  the  conservatism  of  the  French  bank.  From 
1890  to  1900  inclusive,  the  changes  at  the  English  institu- 
tion were  sixty-six;  at  the  French,  nine.1  During  the 
earlier  years  of  the  history  of  the  French  bank,  from  Jan- 
uary 13,  1820,  to  January  14,  1847,  the  rate  was  kept  uni- 
formly at  four  per  cent.  In  more  recent  years,  the  rates 
fixed  on  May  19,  1892, — two  and  a  half  per  cent,  for  com- 
mercial discounts  and  three  and  a  half  per  cent,  for  advances 
on  securities, — remained  for  nearly  three  years  unchanged, 
when  they  were  reduced  on  March  14,  1895,  to  two  and 
three  per  cent.  There  were  changes  resulting  from  the 
South  African  War  in  1898,  which  carried  the  rate  for  dis- 
counts as  high  as  four  and  a  half  per  cent,  for  very  brief  in- 
tervals in  1899  and  1900,  but  on  May  25,  1900,  the  rate  for 
discounts  was  fixed  at  three  per  cent,  and  for  advances  at 
three  and  a  half  per  cent.  These  rates  remained  unchanged 


»  Palgrave,  151. 


72  HISTOR  Y  OF  MODERN  BANKS  OF  ISSUE. 

for  nearly  seven  years,  until  the  growing  pressure  for  capital 
at  the  beginning  of  1907  led  to  an  increase.  The  discount 
rate  was  fixed  on  January  17,  1907,  at  three  and  a  half  per 
cent.,  on  March  2ist,  at  three  percent.,  and  on  November  7th, 
at  four  per  cent. ,  while  at  London  it  stood  at  seven  per  cent, 
and  at  Berlin  at  seven  and  a  half.  With  the  passing  of  the 
storm,  the  rate  went  down  on  January  9,  1908,  to  three 
and  a  half  per  cent.,  and  on  January  23d,  to  three  per 
cent.,  which  remained  unchanged  for  many  months.1 

The  comparative  uniformity  of  the  discount  rate  at  the 
Bank  of  France  has  been  the  result  of  three  factors, — the 
magnitude  of  the  metallic  reserve  ;  the  less  variable  de- 
mands upon  the  bank  than  those  which  fall  upon  the  Bank 
of  England ;  and  definite  adherence  to  a  different  policy  of 
maintaining  the  reserve. 

A  large  reserve  has  made  the  Bank  of  France  less  sensitive 
than  it  might  otherwise  have  been  to  temporary  demands  for 
gold.  Since  the  suspension  of  silver  coinage  on  private  ac- 
count the  gold  hoard  of  the  bank  has,  with  few  interruptions, 
steadily  grown  until  it  was  for  a  time  the  largest  accumula- 
tion of  gold  in  the  world.  The  outpour  of  the  yellow  metal 
from  the  mines  of  South  Africa  accelerated  the  upward  move- 
ment in  spite  of  the  large  demands  made  by  Russia  and  the 
United  States.  By  the  close  of  1902  the  gold  in  the  bank 
stood  at  2,542,700,000  francs,  which  was  an  increase  of 
fully  fifty  per  cent,  over  the  amount  ten  years  before.  This 
amount  was  considerably  increased  in  the  following  years,  in 
spite  of  the  monetary  pressure  of  1907.  For  a  time  the  ac- 
cumulation of  silver  was  in  excess  of  requirements,  but  after 
1892  there  was  a  gradual  decline  in  the  volume  of  the  white 
metal,  which  in  fifteen  years  reduced  the  amount  by  about 
twenty -five  per  cent.8 


»  Assemble  Gtn&rale  des  Actionnairesy  1908,  9. 

2  M.  Pallain,  the  governor  of  the  bank,  points  out  that  the  diminu- 
tion of  the  reserve  which  took  place  during  the  trying  period  of  1907 
was  wholly  in  silver  and  arose  "  from  the  demands  of  the  colonies  or 
from  our  allies  in  the  Latin  Union  of  whom  we  have  every  interest  in 


BANKING  IN  FRANCE. 


73 


The  maximum  and  minimum  holdings  of  gold  and  silver 
at  the  bank,  for  representative  years  since  its  foundation, 
appear  in  the  following  table,  in  francs: 


YEAR. 

GOLD. 

SILVER. 

1811 

Maximum 
21,714,000 

Minimum 
18,301,000 

Maximum 
105,231,000 

Minimum 
91,228,000 

1820 

5I,8l7,OOO 

22,488,000 

167,372,000 

136,925,000 

1830 

1,700,000 

I7I,8OO,OOO 

IO2,5OO,OOO 

1840 

26,7OO,OOO 

10,000,000 

235,000,000 

185,600,000 

1850 

29,2OO,OOO 

5,500,000 

339,100,000 

290,700,000 

1852 

86,800,000 

63,900,000 

447,000,000 

349,7OO,OOO 

1855 

171,000,000 

28,300,000 

92,400,000 

25,OOO,OOO 

1857 

95,9OO,OOO 

36,500,000 

35,400,000 

25,300,000 

1860 

238,300,000 

97,400,000 

325,100,000 

269,000,000 

1865 

39I,2OO,OOO 

215,900,000 

142,800,000 

93,900,000 

1868 

877,IOO,OOO 

662,400,000 

477,300,000 

308,800,000 

1870 

739,300,000 

433,700,000 

579,600,000 

70,900,000 

1875 

I,I76,IOO,OOO 

1,004,300,000 

508,700,000 

309,  2OO,OOO 

1877 

I,556,5OO,OOO 

1,204,100,000 

866,700,000 

637,100,000 

1880 

826,900,000 

536,400,000 

,282,500,000 

,212,000,000 

1885 

I,I75,8OO,OOO 

995,300,000 

,106,100,000 

,O24,4OO,OOO 

1890 

I,32O,9OO,OOO 

1,114,200,000 

,276,900,000 

,239,100,000 

1892 

1,708,300,000 

1,336,200,000 

,299,000,000 

,248,500,000 

1893 

I,72O,goO,OOO 

1,537,200,000 

,285,500,000 

,247,900,000 

1894 

2,061,500,000 

1,695,500,000 

,283,100,000 

,237,400,000 

1895 

2,I52,IOO,OOO 

1,946,200,000 

,262,000,000 

,230,000,000 

1896 

2,077,800,000 

1,926,500,000 

,259,800,000 

,228,200,000 

1898 

1,959,500,000 

1,819,500,000 

,248,500,000 

,2O9,IOO,OOO 

1900 

2,338,700,000 

1,863,900,000 

,158,200,000 

,108,800,000 

1902 

2,624,900,000 

2,438,900,000 

,125,700,000 

,093,700,000 

1904 

2,868,400,000 

2,334,700,000 

,136,000,000 

,097,100,000 

1905 

2,980,800,000 

2,646,000,000 

,113,300,000 

,079,000,000 

1907 

2,8TI,800,000 

2,580,600,000 

998,500,000 

922,800,000 

1910 

S.SOS^00-000 

3,283,300,000 

890,300,000 

823,200,000 

*9r3 

3,527,600,000 

3,179,000,000 

691,100,000 

596,700,000 

Though  willingly  surrendering  a  part  of  its  gold  to  Lon- 
don in  the  fall  of  1907  to  counteract  the  effects  of  the  Ameri- 
can crisis,  the  Bank  of  France  began  to  draw  it  back  again 
after  the  crisis  was  over,  and  by  June  25,  1908,  had  accumu- 
lated a  gold  stock  of  3,151,392,000  francs  ($608,250,000),  the 
largest  ever  held  in  its  history.  The  discount  rate  remained 


facilitating  their  re-stocking."  Of  the  400,000,000  francs  lost  since 
1892,  he  computed  that  half  had  gone  since  1904. — Assemble  Gtnkrale 
des  Actionnaires,  1908,  15. 


74  HISTOR  Y  OF  MODERN  BANKS  OF  ISSUE. 

fixed  at  three  per  cent,  in  the  face  of  demands  in  some 
quarters  that  it  be  further  reduced  l ;  but  even  this  rate  gave 
point  to  the  declaration  of  the  annual  report  for  1906,  that  if 
the  bank  was  reproached  for  locking  up  so  much  unpro- 
ductive capital,  a  little  reflection  would  show  that  its  pres- 
ence in  the  bank  vaults  had  procured  for  several  thousands 
of  millions  of  commercial  paper  circulating  in  France  a  rate 
of  discount  lower  by  three  and  sometimes  by  four  per  cent, 
than  that  of  neighboring  countries  and  that  by  this  means 
a  material  profit  had  been  assured  to  the  merchants  and 
manufacturers  of  the  country.1 

While  the  metallic  reserve  of  the  Bank  of  France  sustains 
a  large  volume  of  outstanding  notes,  and  the  bank  stands 
ready  to  rediscount  paper  for  the  joint  stock  banks,  there  are 
fewer  and  smaller  sudden  demands  for  money  than  in  I/m- 
don.  Foreign  trade,  the  demand  for  exchange,  and  the 
investment  of  capital  abroad  plays  a  smaller  part  than  on 
the  I>ndon  market.9  At  the  close  of  1907  deposits  and 
creditor  current  accounts  in  the  five  principal  French  stock 
banks  were  about  3,500,000,000  francs  ($700,000,000)  and 
reserves  in  currency  or  on  deposit  in  other  banks  were 
330,000,000  francs  ($66,000,000) .  The  corresponding  figures 
for  English  joint  stock  banks  were  deposits  of  $4,200,000,000 
and  cash  resources  of  $850,000,000.  Obviously,  to  meet 
possible  demands  of  such  magnitude  it  is  essential  for  the 
Bank  of  England  to  take  resolute  action  when  its  reserve 
is  threatened.  The  English  institution,  moreover,  lacks  the 
power  to  meet  emergencies  by  the  issue  of  its  notes,  which  is 


'It  was  pointed  out  that  even  this  great  reserve,  including  921,072,- 
ooo  francs  in  silver,  was  less  in  proportion  to  note  and  deposit  liabili- 
ties than  in  1896,  being  72^  per  cent,  as  against  75  per  cent,  at  the 
earlier  date  ;  but  the  ratio  of  the  reserve  was  as  3078  million  francs 
gold  to  914  million  francs  silver  in  May,  1908,  against  1962  to  1247 
in  May,  1896,  which  afforded  an  immensely  stronger  gold  position. — 
Moniteur  des  Intirgts  Mattrieh,  June  7,  1908,  1871. 

8  Bulletin  de  Statistique,  February,  1907,  I/XI.,  221. 

'Palgrave,  149. 


BANKING  IN  FRANCE.  75 

one  of  the  chief  resources  of  the  Bank  of  France.  It  is  the 
knowledge  that  this  power  of  note  issue  can  be  availed  of  for 
making  rediscounts,  practically  without  limit,  which  enables 
the  joint  stock  banks  of  France  to  do  business  in  safety  with 
slender  cash  reserves,  and  has  made  the  central  bank  a 
refuge  in  time  of  trouble.  It  was  declared  by  I^eon  Say  that 
1 '  in  times  of  crisis  the  r61e  of  the  Bank  of  France  was  to 
liquidate  all  other  banks,"  meaning  thereby  that  on  such 
occasions  paper  suitable  for  discount  and  good  securities  are 
brought  freely  to  the  bank  in  the  knowledge  that  they  can 
be  exchanged  for  notes.1  The  largest  of  the  joint  stock 
banks  is  the  Credit  Lyonnais,  with  deposits  at  the  close  of 
1907  amounting  to  1,542,800,000  francs  ($298,000,000).  The 
other  two  of  chief  importance  are  the  Societe  Gen£rale  and 
Comptoir  Nationale  cT  Escompte,  each  with  deposit  obligations 
of  over  800,000,000  francs.2 

Apart  from  these  differences  in  its  position,  however,  the 
Bank  of  France  has  for  many  years  pursued  deliberately  the 
policy  of  protecting  its  reserve  under  certain  conditions  by 
buying  gold  at  a  loss  rather  than  by  imposing  upon  commerce 
the  burden  of  an  increase  in  the  discount  rate.  It  is  recog- 
nized that  this  method  is  not  efficient  in  an  economic  crisis, 
because  it  does  not  operate  upon  the  whole  commercial 
structure  to  restrict  loans  and  speculation  and  to  attract 
capital  from  abroad.  There  are  occasions  on  which  the 
French  method  may  properly  be  used,  however,  as  when 
credit  is  not  unduly  expanded  and  where  a  demand  for 
gold  has  arisen  from  special  and  recognizable  causes.  While 
this  method  of  protecting  the  gold  reserve  was  at  first  con- 
demned by  economists,  and  while  their  censure  was  well 
founded  so  far  as  it  applied  to  its  use  to  counteract  the  drain 
of  a  crisis  and  to  redress  the  balance  of  the  foreign  exchanges, 
it  has  come  to  be  recognized  in  recent  years  that  it  may  be 
combined  in  a  cautious  manner  with  the  English  method  of 


'Neymarck,  Finances  Contemporaines,  493. 

2  Economists  Europ£eny  March  6,  1908,  XXXIII.,  295. 


70  HIS  TOR  Y  OF  MODERN  BA  NKS  OF  ISS  UE. 

advancing  the  discount  rate,  with  benefits  to  legitimate  busi- 
ness. The  choice  of  either  method,  or  the  prudent  use  of 
both  methods  in  conjunction  with  each  other,  depend  largely 
upon  the  ability  of  bankers  to  judge  whether  the  drastic 
pressure  of  sharp  advances  in  the  discount  rate  is  required  in 
order  to  arrest  the  expansion  of  credit  and  check  dangerous 
speculation. 

While  the  project  of  direct  profit-sharing  is  not  enforced 
so  avowedly  by  the  government  upon  the  Bank  of  France  as 
upon  some  other  European  banks,  the  Treasury  receives  a 
liberal  proportion  of  the  earnings  of  the  bank.  By  various 
forms  of  taxation  the  government  in  1907  collected  thirteen 
per  cent,  of  gross  earnings  and  more  than  twenty-three  per 
cent,  of  net  earnings.  The  total  amount  thus  absorbed 
was  11,082,218  francs  ($2,140,000)  of  which  about  7,357,141 
francs  ($1,420,000)  came  under  the  head  of  the  return  to  the 
State  as  fixed  by  the  charter  of  1897.  Up  to  that  time  an 
annual  tax  had  been  paid  of  2,500,000  francs.  The  new  law 
provided  that  the  government  should  receive  one-eighth  of  the 
rate  of  discount  upon  the  productive  operations  of  the  bank, 
but  in  no  case  less  than  2,000,000  francs  per  year.  The 
productive  operations  were  based  upon  the  difference  between 
the  metallic  reserve  and  total  operations.1  Another  provision 
of  the  charter  of  1897  provided  that  profits  arising  from  a 
discount  rate  above  five  per  cent,  should  be  covered  to  the 
proportion  of  three-fourths  into  the  public  Treasury.  The 
object  of  this  provision  was  to  discourage  the  advance  of  the 
discount  rate  as  a  means  of  retaining  gold.  It  did  not  be- 
come operative,  however,  until  1907,  when  certain  special 
discounts  of  English  paper  were  consented  to  at  a  rate  above 
five  per  cent. 


1  Calculations  summed  up  by  Pommier  showed  that  from  1874 
to  1896  the  new  plan  would  have  yielded  the  government  about 
37,000,000  francs  more  than  the  old,  even  though  in  certain  years 
the  return  would  have  fallen  below  2,500,000  francs. —  La  Banque  de 
France  et  /' Etat,  402-403.  The  total  payments  under  the  new  provision 
and  the  amendment  of  1911,  to  the  close  of  1913,  were  95,765,133  francs. 


BANKING  IN  FRANCE.  77 

The  permission  given  to  the  government  to  revise  the  bank 
charter  during  the  year  1911  was  availed  of  to  impose  upon 
the  Bank  of  France  several  new  charges  and  obligations. 
An  agreement  was  made  between  the  government  and  the 
bank  in  November,  which  became  law  on  December  30,  1911, 
embodying  the  new  arrangements.  Although  the  circula- 
tion was  still  more  than  500,000,000  francs  below  the  legal 
maximum  under  the  law  of  1897,  the  maximum  was  raised 
by  the  new  law  to  6,800,000,000  francs  ($1,312,400,000). 
The  provision  of  the  law  of  1897,  by  which  the  government 
was  granted  one-eighth  of  the  proceeds  of  discounts  upon 
the  productive  operations  of  the  bank,  was  modified  so  that 
whenever  a  rate  of  discount  prevailed  higher  than  three  and 
a  half  per  cent.,  the  proportion  paid  to  the  government 
should  be  one-seventh,  and  when  a  rate  higher  than  four  per 
cent,  prevailed,  the  proportion  should  be  one-sixth.  The 
amount  of  the  advance  to  the  Treasury,  without  interest, 
was  increased  by  20,000,000  francs  to  a  total  of  200,000,000 
francs  ($38,600,000).  The  bank  was  required  to  relieve  of  all 
charges  the  transfer  of  funds  for  depositors  between  different 
places  and  to  discount  under  proper  conditions  drafts  payable 
abroad  and  in  the  French  colonies.1 

The  number  of  branches  and  other  banking  offices  of  the 
Bank  of  France  has  been  increased  from  time  to  time,  from 
249  at  the  close  of  1894,  to  467  at  the  close  of  1907,  and  583 
at  the  close  of  1913.  The  number  of  employees  increased 
from  2332  in  1894  to  3827  m  I9I3- 


1  Economiste  Europeen,  January  5,  1912,  XIvL,  13. 


CHAPTER  IV. 

FIRST   CENTURY   OF  THE   BANK   OF     ENGLAND. 

The  Economic  and  Financial  Conditions  Out  of  Which  the  Bank 
Grew— Early  Difficulties  and  the  First  Suspension  of  Specie  Pay- 
ments— The  Loans  of  the  Napoleonic  Wars  and  the  Restriction 
of  1797 — Pitt's  Enormous  Drafts  upon  the  Bank. 

THE  Bank  of  England,  like  many  of  the  Continental 
banks,  had  its  origin  in  the  needs  of  the  State.  The 
institution  which  resulted  has  been  several  times  the 
victim  of  the  monetary  necessities  of  the  government,  but 
has  not  been  dragged  quite  so  persistently  as  the  banks 
of  Italy,  Austria,  and  Russia  through  the  mire  of  depreciated 
money  and  forced  legal  tender.  The  Bank  of  England  has 
come  to  enjoy,  by  a  series  of  changes  in  the  law,  the  substan- 
tial monopoly  of  note  issue  in  England  and  Wales,  and  has 
proved  one  of  the  strongest  banking  institutions  of  the  world. 
The  note  circulation,  since  the  Act  of  1844,  is  based  wholly 
upon  securities  and  deposits  of  coin  and  bullion.  The  rigidity 
of  the  English  system,  by  which  expansion  is  prevented  to 
meet  changing  conditions  of  business,  has  received  the  con- 
demnation of  most  students  of  political  economy,  but  this  has 
not  kept  it  from  becoming  to  some  extent  the  model,  of 
national  banks  of  later  foundation  on  the  Continent  of 
Europe.  The  defects  of  the  English  system  of  note  issues 
are  those  which  are  most  apparent  in  a  country  where  deposit 
banking  is  in  its  .infancy.  They  are  less  obvious  and  oppres- 
sive in  England  than  they  would  otherwise  be  because  of 
her  small  area,  the  wide  use  of  credit  instruments  and  the 
closely-knit  commercial  relations  of  her  people. 


FIRST  CENTURY  OF   THE  BANK  OF  ENGLAND.      ?g 

The  creation  of  the  Bank  of  England  is  involved  with 
both  the  political  and  fiscal  history  of  the  close  of  the  seven- 
teenth century.  England  was  behind  Italy  and  Holland  in 
the  development  of  the  mechanism  of  modern  commerce,  and 
the  proposition  to  establish  a  banking  system  was  sharply 
resisted  by  Gerard  Malynes,  who  published  in  1601  a 
Treatise  of  the  Canker  of  England 's  Commonwealth.  Malynes 
described  the  Continental  method  of  banking  with  a  fairness 
and  precision  which  enable  its  leading  features  to  be  readily 
understood,  in  spite  of  his  opinion  that  payments  by  the 
banks  by  transfers  upon  their  books  were  "  almost  or  rather 
altogether  imaginative  or  figurative."  '  English  merchants 
deposited  their  cash  for  a  time  in  London  Tower,  but  .£120,- 
ooo  was  seized  by  Charles  I.,  in  1640,  and  only  repaid  after 
violent  protests  and  long  delay.2  The  goldsmiths  then  be- 
came the  bankers  for  the  community  and  paid  interest  for 
the  money  left  in  their  custody.  There  was  much  opposition 
to  the  new  system  at  first  and,  strange  to  say,  one  of  the 
last  to  adhere  to  the  old  method  of  keeping  his  cash  in  a 
strong  box  at  home  was  Sir  Dudley  North,  one  of  the  most 
progressive  thinkers  on  political  economy  of  his  time.  As 
Macaulay  graphically  recounts  North's  experience,  "  He 
found  that  he  could  not  go  on  Change  without  being  fol- 
lowed around  the  piazza  by  goldsmiths,  who,  with  low  bows, 
begged  to  have  the  honor  of  serving  him.  He  lost  his 
temper  when  his  friends  asked  where  he  kept  his  cash. 
'Where  should  I  keep  it,'  he  asked,  'but  in  my  own 
house?'  "  3 

While  commerce  was  coming  to  feel  more  and  more  the 
need  of  a  banking  institution,  the  government  was  also  feel- 
ing the  necessity  of  some  method  of  raising  money  beyond 
the  precarious  plan  of  sending  agents  to  individual  mer- 
chants to  see  what  they  would  lend.  The  historic  legend 
that  King  James  I.  attempted  out  of  a  spirit  of  pure  wanton- 
ness to  levy  excessive  and  unusual  taxes  upon  the  people  of 

1  Cunningham,  II.,  98. 

2  MacLeod,  Theory  and  Practice  of  Banking ,  I.,  435. 

3  History  of 'England,  Chap.  xx. 


80  HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

England  is  not  fully  borne  out  by  the  facts.  The  method 
of  taxation  which  he  sought  to  introduce  was  simply  a  phase 
of  the  transition  from  feudal  to  modern  methods  of  carrying 
on  public  affairs.  As  a  careful  student  of  the  economic  his- 
tory of  England  puts  it  : 

According  to  ancient  usage  the  King  had  been  able  to  live  of  his 
own,  and  had  recourse  to  Parliament  in  emergencies.  The  chief 
problem  of  the  seventeenth  century  was  to  find  a  source  of  revenue 
which  would  supply  a  regular  income,  that  might  adequately  corre- 
spond to  the  increased  responsibilities  of  government  in  these  more 
modern  times.  The  first  attempt  to  do  this  was  in  the  Great  Con- 
tract, proposed  to  the  Parliament  in  1610  ;  by  this  James  proposed  to 
relinquish  all  the  occasional  payments  from  feudal  tenures,  in  return 
for  a  regular  income  of  ^200,000  to  be  derived  from  parliamentary 
supplies. 

As  this  bargain  broke  down,  James  was  a  considerable  sufferer ; 
Charles  I.,  to  whom  Tunnage  and  Poundage  were  not  voted  for  life, 
was  left  in  a  position  of  direct  dependence  on  parliamentary  grants, 
and  he  did  not  conceal  his  resentment.  During  both  of  these  reigns 
every  effort  was  made  to  secure  supplies  from  extra-parliamentary 
sources  ;  while  the  Commons,  who  were  eagerly  anxious  to  assert 
their  position  and  exercise  a  real  control  over  the  foreign  as  well  as 
the  domestic  policy  of  the  realm,  were  always  on  the  alert  to  thwart 
these  attempts.  l 

The  parliamentary  party  succeeded  in  organizing  a  system 
of  taxation  by  means  of  customs  duties,  monthly  levies  upon 
real  estate  and  excises  on  internal  trade,  which  continued  in 
full  force  after  the  restoration  of  the  Stuarts.  These  taxes 
laid  the  foundation  of  the  modern  method  of  defraying  the 
expenses  of  government,  but  they  were  inadequate  for  many 
extra  expenses  and  for  carrying  on  the  wars  in  which 
Charles  II.  and  William  III.  found  themselves  involved. 
Charles  II.  turned  for  assistance  to  the  goldsmiths.  But  his 
rapacity  soon  outran  his  borrowing  capacity,  and  he  gave  a 
violent  shock  to  credit  by  a  proclamation  of  January  2,  1672, 
refusing  payment  out  of  the  Exchequer  of  money  advanced 
and  sequestrating  ,£1,328,526  to  his  own  use.  The  money, 
although  lent  by  the  goldsmiths  to  the  King,  was  the  prop- 

1  Cunningham,  II.,  215. 


FIRST  CENTURY  OF   THE  BANK  OF  ENGLAND.      8 1 

erty  of  some  10,000  depositors  and  its  loss  spread  ruin  and 
suffering  throughout  I^ondon.  A  long  course  of  litigation 
ensued,  which  finally  ended  in  the  reign  of  William  by  the 
consolidation  of  the  indebtedness  with  other  portions  of  the 
permanent  national  debt.1  This  conduct  on  the  part  of  the 
Stuart  King  made  the  people  and  the  bankers  cautious 
about  loaning  to  the  government,  and  William  III.  was 
driven  to  desperate  expedients  to  obtain  revenue  to  carry 
on  the  war  with  France.  A  poll  tax  was  imposed,  stamp 
duties  were  levied  which  have  never  been  entirely  repealed, 
and  enormous  prizes,  in  the  form  of  annuities  on  the  ton- 
tine plan,  were  offered  to  those  who  would  lend  to  the  State. 

A  plan  was  presented  to  the  Committee  of  the  House  of 
Commons,  while  they  were  considering  the  claims  of  the 
goldsmiths  in  the  autumn  of  1691,  which  contained  the 
germs  of  the  organization  of  the  Bank  of  England.  William 
Paterson,  himself  an  obscure  Scotchman,  but  supported  by 
several  wealthy  L,ondon  merchants,  offered  to  advance 
;£i, 000,000  to  the  government  on  condition  of  receiving 
,£65,000  a  year  as  interest  and  the  costs  of  management  and 
authority  to  issue  bills  which  should  be  legal  tender.  The 
government  refused  to  give  forced  currency  to  the  bills  and 
the  matter  fell  through  until  1694.  Montague,  the  ingenious 
and  enterprising  minister  of  William,  then  sent  for  Paterson 
and  requested  him  to  organize  a  plan.  The  new  project 
contemplated  a  loan  of  ,£2,000,000  to  the  government  at 
seven  per  cent.,  but  the  ministry,  who  were  accustomed  to 
discounts  and  commissions  of  forty  per  cent,  on  short  loans, 
could  not  be  made  to  believe  that  a  loan  with  no  fixed  date 
of  maturity  could  be  floated  at  such  a  low  rate.  The  gov- 
ernment turned  to  other  plans,  but  Paterson  persevered  and 
presently  obtained  the  help  of  Mr.  Michael  Godfrey,  who 
carried  the  scheme  to  a  successful  conclusion.  It  was  put 
in  definite  shape  by  Montague  and  was  saddled  upon  the 
Ways  and  Means  bill  (Statutes  1694,  ch.  20),  in  a  form 
which  would  be  characterized  in  modern  legislation  as 
"a  rider." 

1  MacLeod,  Theory  and  Practice  of  'Banking ;  I.,  441-44. 

6 


82  HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

"  The  Governor  and  Company  of  the  Bank  of  England  " 
was  the  official  designation  of  the  new  bank,  but  it  was 
called  by  its  enemies  the  Tonnage  Bank,  because  the  bill 
levied  certain  tonnage  dues  as  well  as  customs  and  other 
taxes.  The  necessity  of  money  was  so  great  that  the  bill 
passed  without  a  division  in  the  Commons,  and  in  a  very 
thin  house.  There  was  some  opposition  in  the  House  of 
L,ords,  and  much  criticism  of  the  action  of  the  Commons  in 
attaching  the  provisions  for  the  bank  to  a  tax  bill.  It  was 
already  May,  according  to  the  new  style,  when  the  final 
struggle  occurred,  and  the  debate  of  the  last  day  continued 
from  nine  in  the  morning  till  six  in  the  evening.  It  was 
proposed  to  strike  out  all  the  clauses  relating  to  the  bank, 
but  its  defenders  suggested  that  this  would  be  to  invite  a  con- 
test with  the  Commons  over  the  old  political  issue,  whether 
the  Lords  had  the  right  to  amend  a  money  bill.  This 
argument  prevailed,  the  amendment  was  rejected,  thirty- 
one  votes  in  its  favor  to  forty-three  in  the  negative,  and  a 
few  hours  later  the  bill l  received  the  royal  assent  and  Parlia- 
ment was  prorogued. 

The  new  bank  was  to  be  organized  upon  the  loan  by  the 
stockholders  of  ,£1,200,000  ($6,000,000)  a  to  the  government, 
and  was  authorized  to  issue  notes,  to  deal  in  bullion  and 
commercial  bills  and  to  make  advances  on  merchandise.  Sub- 
scriptions were  opened  on  Thursday,  June  2ist,  in  the  Mer- 
cer's Chapel,  and  one-quarter  of  the  capital  was  subscribed 
the  first  day.  Half  was  subscribed  within  three  days,  and 
by  Monday  noon,  July  2d,  the  entire  subscription  was  com- 
pleted. Among  the  subscribers  were  Sir  John  Houblon,  the 
first  Governor,  who  was  descended  from  a  Flemish  refugee  ; 


1  The  date  was  April  24,  1694,  old  style  ;  May  4,  new  style.     The 
dates  here  given  are  from  the  contemporary  records  and  are  old  style. 

2  The  value  of  the  English  pound  sterling  is  so  generally  known 
that  I  have  not  thought  it  necessary  in  this  and  the  following  chapter 
to  give  the  equivalents  in  United  States  money  for  the  sums  named. 
The  value  of  the  pound  sterling  as  reported  by  the  Director  of  the 
Mint  of  the  United  States  is  $4.8665,  but  for  the  purpose  of  computing 
round  figures  is  usually  taken  at  $5.00. 


FIRST  CENTURY  OF   THE  BANK  OF  ENGLAND.      83 

Michael  Godfrey,  one  of  the  most  active  organizers  of  the 
bank  and  the  first  Deputy  Governor  ;  Queen  Mary  ;  the 
Duke  of  Leeds,  the  Duke  of  Devonshire,  the  Earl  of  Port- 
land, the  Countess  of  Carlisle,  Lord  Godolphin,  Lady  Ann 
Mason,  Sir  Stephen  Fox,  and  Sir  John  Trenchard.  The 
new  bank  began  the  discharge  of  its  pledges  to  the  govern- 
ment by  paying  into  the  Exchequer  ^112,000  in  bank-bills, 
sealed  with  the  seal  of  their  corporation,  which  bore  the 
figure  of  Britannia  sitting  on  a  bank  of  money.1  The  busi- 
ness of  the  bank  was  described  by  Godfrey,  who  wrote  a 
tract  in  its  support,  as  follows  : 

They  lend  money  on  mortgages  and  real  securities  at  five  per  cent, 
per  annum.  If  the  titles  of  land  were  made  more  secure,  money 
would  be  lent  on  land  at  four  per  cent,  per  annum,  and  in  time  of 
peace  at  three  per  cent.  Foreign  bills  of  exchange  are  discounted 
at  four  and  a-half  per  cent.  ;  inland  bills  and  notes  for  debts  at  six 
per  cent.  They  who  keep  their  cash  in  the  bank  have  the  first  of 
these  discounted  at  three  per  cent,  and  the  other  at  four  and  a-half. 
Money  is  lent  on  pawns  of  such  commodities  as  are  not  perishable  at 
five  per  cent.,  and  on  the  Fund  of  the  City  of  London  Orphans  at  five 
per  cent.2 

The  stock  of  the  bank  was  at  par  on  December  13,  1695, 
little  more  than  a  year  after  it  began  actual  operation,  but 
within  the  next  two  years  it  had  to  deal  with  a  combination 
of  difficulties  which  caused  the  suspension  of  specie  pay- 
ments, and  required  all  the  courage  and  ability  of  the 
directors  to  surmount.  The  bank  was  essentially  a  Whig 
institution  and  a  representative  of  the  commercial  interests 
of  London  ;  and  it  encountered  the  same  sort  of  jealous 
hostility  from  the  landed  interest  which  has  prevailed  in 
more  recent  times  against  the  moneyed  interests  of  * '  Wall 
Street  "  and  "  Lombard  Street."  The  fate  of  the  bank  was 
so  closely  bound  up  with  that  of  the  Revolutionary  govern- 
ment that  it  was  compelled  to  lend  its  support  on  all  occa- 
sions of  emergency,  or  run  the  risk  of  seeing  the  entire  debt 
due  by  the  government  repudiated  by  the  restoration  of  the 

1  Rogers,  The  First  Nine  Years  of  the  Bank  of  England,  3. 
9  Rogers,  20. 


84  HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

Stuarts.  The  Bank,  in  the  forcible  language  of  Macaulay, 
"  Was  Whig  not  accidentally,  but  necessarily.  It  must  have 
instantly  stopped  payment  if  it  had  ceased  to  receive  the 
interest  on  the  sum  which  it  had  advanced  to  the  govern- 
ment ;  and  of  that  interest  James  would  not  have  paid  one 
farthing. ' '  Mr.  Bagehot  declares  that  without  the  aid  of  the 
bank  : 

Our  national  debt  could  not  have  been  borrowed  ;  and  if  we  had 
not  been  able  to  raise  that  money  we  should  have  been  conquered  by 
France  and  compelled  to  take  back  James  II.  And  for  many  years 
afterwards,  the  existence  of  that  debt  was  a  main  reason  why  the 
industrial  classes  never  would  think  of  recalling  the  Pretender  or 
of  upsetting  the  Revolution  settlement :  the  "  fundh older"  is  always 
considered  in  the  books  of  that  time  as  opposed  to  his  "  legitimate  " 
sovereign.1 

The  political  enemies  of  the  bank  were  supported  by  the 
goldsmiths  and  other  financial  men  whose  monopoly  of 
money  lending  was  assailed  by  the  new  institution.  The 
managers  of  the  bank  enjoyed  from  the  outset  three  privi- 
leges which  gave  them  an  immense  superiority  over  all 
competitors  and  enabled  them  to  reduce  the  charges  for  bank- 
ing. They  received  the  government  balances  ;  they  enjoyed 
alone  the  privilege  of  limited  liability,  by  which  the  share- 
holders were  liable  for  the  debts  of  the  bank  only  to  the 
amount  of  their  investment  and  not  for  its  entire  liability  ; 
and  they  were  able  to  loan  money  in  excess  of  their  deposits 
by  reason  of  the  circulating  notes  they  were  allowed  to  issue 
against  the  government  debt.  The  goldsmiths  were  able  to 
do  only  the  business  of  deposit  banking,  and  were  supposed 
to  lend  only  coin,  or  credit  for  which  they  held  coin  in  their 
vaults.8  The  goldsmiths,  therefore,  undoubtedly  felt  justi- 
fied by  reasons  of  self-preservation  in  lending  their  support 
to  any  plan  which  would  break  down  their  powerful  rival. 
Such  a  plan  was  presented  in  the  scheme  of  a  I^and  Bank 
which  was  brought  before  Parliament  by  Hugh  Chamberlain 
in  1695. 

1  Lombard  Street,  Works,  V.,  64. 

2  Cunningham,  II.,  396. 


FIRST  CENTURY  OF   THE  BANK  OF  ENGLAND.      85 

Chamberlain's  scheme  was  to  issue  notes  upon  landed 
property  to  one  hundred  times  the  annual  rental,  lend  the 
notes  to  the  owner  of  the  land,  and  in  some  unexplained 
way  furnish  money  to  the  government  at  the  same  time. 
The  absolute  absurdity  of  calculating  the  money  value  of  a 
piece  of  real  estate  at  one  hundred  times  the  rental,  when 
the  fee  simple  was  worth  only  twenty  times  the  rental,  or 
one-fifth  as  much,  was  demonstrated  over  and  over  again, 
but  the  opponents  of  the  Land  Bank  were  answered  that 
they  were  ' '  usurers, ' '  and  the  enemies  of  the  Bank  of  Eng- 
land were  ready  to  catch  at  any  scheme  which  promised  to 
promote  their  projects.  Notwithstanding  its  folly  the  scheme 
was  authorized  by  law  and  received  the  royal  assent  on  April 
27, 1696,  (7  and  8  William  III.,  c.  31).  The  Land  Bank  pro- 
posed to  advance  to  the  government  ,£2,564,000,  on  which 
interest  was  to  be  paid  at  the  rate  of  seven  per  cent,  annu- 
ally, secured  by  a  special  tax  on  salt.  The  King  was  au- 
thorized to  appoint  a  body  of  commissioners  to  receive 
subscriptions,  half  of  which  were  required  to  be  subscribed 
before  August  i,  1696,  and  the  whole  before  January  i,  1697. 
Subscriptions  did  not  materialize,  however,  with  such  rapidity 
as  expressions  of  sympathy  for  the  enterprise.  The  Lords 
of  the  Treasury  subscribed  ^5000  on  behalf  of  the  King, 
but  the  other  subscriptions  never  exceeded  ^2100,  and  it  is 
recorded  about  three  years  later  that  Dr.  Chamberlain,  "  sole 
contriver  and  manager  of  the  Land  Bank,  is  retired  to 
Holland,  on  suspicion  of  debt."  1 

The  immediate  effect  of  the  new  legislation  was  to  depress 
the  price  of  bank  shares,  which  fell  from  107  on  January  3ist, 
to  83  on  February  i4th.2  Capital  was  not  so  abundant  then 
as  now  and  the  mere  offer  of  a  new  public  stock  was  sufficient 
to  divert  investment  from  the  old  and  depress  its  value.  It 
was  argued  even  by  the  friends  of  the  bank  that  it  must  be 
the  sole  institution  of  its  kind,  like  the  banks  of  Venice, 
Amsterdam,  and  Hamburg,  in  order  to  retain  strength  and 
usefulness.  The  experience  that  the  stocks  of  an  existing 

1  Rogers,  56. 

2  Rogers,  50. 


86  HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

company  declined  under  the  influence  of  competition  was 
illustrated  in  a  striking  manner  by  the  history  of  the  East 
India  Company,  whose  scock  stood  at  158  in  the  beginning 
of  1692,  but  sank  to  38  after  Montague  brought  forward  his 
plan  for  the  new  or  English  East  India  Company.  The 
close  calculations  which  are  now  made  regarding  the  earn- 
ing capacity  and  value  of  stocks  were  little  understood  at 
that  time  and  the  unreasonable  declines  as  well  as  extrava- 
gant advances  which  occurred  are  illustrated  a  little  later  by 
the  history  of  the  Mississippi  scheme  in  France  and  the 
South  Sea  Bubble. 

The  bank  had  real  financial  difficulties  to  cope  with  as 
well  as  those  arising  from  political  distrust  and  competition. 
The  recoinage  which  was  ordered  by  the  Act  of  7  William 
III.,  ch.  i,  to  take  full  effect  on  February  i,  1697,  found 
the  bank  with  a  large  quantity  of  clipped  coin  on  hand  for 
which  they  were  bound  to  pay  in  new  pieces  of  full  weight. 
The  new  coinage  was  progressing  too  slowly  to  meet  de- 
mands, the  smallest  denomination  of  bank-notes  was  ,£20, 
and  the  result  was  a  run  upon  the  bank  for  cash  during  the 
week  beginning  May  4,  1696.  The  goldsmiths  were  charged 
with  gathering  together  ^"30,000  in  notes  for  the  purpose  of 
breaking  the  bank.  The  directors,  knowing  the  purpose  of 
the  demand,  refused  to  redeem  these  notes,  but  voted  to  con- 
tinue their  payments  to  their  ordinary  customers.  Sir  John 
Houblon,  who  was  Lord  Mayor  as  well  as  Governor  of  the 
bank,  succeeded  in  reassuring  the  applicants  for  cash  for  a 
time,  and  the  proprietors  of  the  bank  agreed  to  put  off  their 
dividend.  The  government  failed,  however,  to  make  an  ex- 
pected payment  of  ^"80,000  and  the  bank  was  compelled  to 
accept  an  order  of  the  Lords  of  the  Treasury  on  July  13, 
1696,  that  no  public  notary  should  enter  a  protest  upon  any 
bill  of  the  Bank  of  England  for  fourteen  days.  As  a  protest 
could  only  be  effective  at  that  time  when  thus  entered,  the 
effect  of  the  order  was  a  practical  suspension  of  specie  pay- 
ments, which  lasted  until  the  autumn  of  1697. 

It  is  not  surprising  that  the  bank  was  unable  to  cope  with 
its  difficulties  and  that  many  impracticable  and  speculative 


FIRST  CENTURY  OF   THE  BANK  OF  ENGLAND.      87 

schemes  were  set  on  foot,  for  the  time  was  essentially  a  period 
of  transition.  The  industrial  and  commercial  world  had 
barely  set  foot  upon  the  threshold  of  the  wonderful  develop- 
ment of  the  eighteenth  and  ninteenth  centuries.  Great 
Britain  until  the  time  of  Elizabeth  had  been  only  a  second 
or  third  rate  power  in  Europe,  overshadowed  by  the  great 
Kingdoms  of  France  and  Spain,  by  the  ancient  prestige  of 
the  German  Emperor,  and  by  the  power  of  the  Pope.  Her 
influence  was  raised  by  the  defeat  of  the  Spanish  Armada, 
but  the  population  of  England  and  Wales  at  the  Revolution 
of  1688  was  only  five  and  a  half  millions,  and  the  supremacy 
in  the  money  markets  and  trade  of  the  world  still  belonged 
to  the  bankers  and  merchants  of  Holland  and  Italy.  The 
UvSe  of  bank-notes,  except  as  mere  certificates  against  which 
coin  and  bullion  was  held  to  the  full  amount,  had  begun  only 
thirty  years  before  the  Revolution,  and  the  proper  manage- 
ment of  a  banking  currency  was  almost  purely  a  problem  of 
abstract  theory  rather  than  of  practical  experience.  If  mer- 
chant princes  and  the  kings  of  finance  stood  upon  the  threshold 
of  an  unknown  world,  the  mass  of  the  community  but  dimly 
viewed  it  from  afar.  They  were  easily  deluded  by  extrava- 
gant hopes  and  easily  misled  by  the  fairy  tales  of  the  splendid 
riches  and  possibilities  of  the  Western  Continent.  Least  of 
all  could  the  general  public  be  expected  to  grasp  instantly 
the  fact,  which  is  not  accepted  by  great  masses  of  people 
to-day,  that  a  paper  currency,  in  order  to  have  a  steady 
purchasing  power,  must  be  redeemable  on  demand  in  coin. 
As  Mr.  Cunningham  acutely  says,  regarding  the  run  upon 
the  Bank  of  England  in  1696  : 

This  was  a  principle  which  men  did  not  find  it  easy  to  recognize. 
They  saw  that  the  man  who  had  wealth  in  any  shape  had  credit ; 
but  they  did  not  apparently  understand  that  bills  can  only  be  cir- 
culated, when  there  is  a  certainty  that  they  can  be  met  on  presenta- 
tion, and  that  wealth,  in  forms  which  cannot  be  readily  realized,  is 
not  a  satisfactory  basis  for  a  credit  circulation.1 

The  suspension  of  specie  payments  was  naturally  followed 
by  a  depreciation  in  the  bank-notes.  The  discount  on  July 

1  Growth  of  English  Industry  and  Commerce ',  II.,  397. 


88  HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

28,  1696,  was  ten  per  cent,  and  October  loth,  twenty  per  cent. 
The  Bullion  Report,  discussing  this  subject  in  1810,  declared 
that  ' '  the  quantity  of  the  notes  became  excessive,  their 
relative  value  was  depreciated,  and  they  fell  to  a  discount  of 
seventeen  per  cent."  This  opinion,  that  the  note  issues 
were  excessive,  is  supported  also  by  the  high  authority  of 
Professor  Rogers,1  but  is  disproved  by  Professor  MacLeod, 
in  so  far  as  excess  of  issues  is  to  be  interpreted  as  implying  a 
larger  supply  of  money  than  could  be  absorbed  by  the  demands 
of  commerce.  That  the  issues  of  the  bank  were  excessive 
in  proportion  to  its  coin  reserve  is  hardly  a  subject  for  dis- 
pute, in  view  of  the  account  submitted  to  the  House  of 
Commons  on  December  4,  1696,  showing  the  amount  due  on 
notes  for  running  cash  to  be  ^764, 196,  and  the  actual  cash 
held  ,£35,664,  in  addition  to  .£9,636  in  goldsmiths'  notes. 
That  the  issues  were  excessive  in  this  sense  is  proved  by  the 
suspension  of  specie  payments,  but  that  they  were  excessive 
in  the  sense  implied  by  the  Bullion  Report  is  shown  to 
be  untrue  by  the  state  of  exchange  on  Hamburg,  which 
promptly  became  favorable  to  England  upon  the  reform  of 
the  coinage  and  while  bank-notes  were  still  at  a  discount. 
The  test  whether  issues  were  in  excess  of  the  necessities  of 
trade  was  the  state  of  the  foreign  exchanges,  which  were  at 
par  in  coin,  and  the  depreciation  in  the  bank-notes  was 
plainly  due  to  the  fact  that  they  had  ceased  to  be  redeem- 
able in  coin  on  demand.3 

The  collapse  of  the  Land  Bank  and  the  necessity  for  new 
government  loans  led  to  the  legislation  of  February  3,  1697, 
to  increase  the  capital  of  the  Bank  of  England  and  give  it 
wider  privileges.  The  charter  was  renewed  until  the  expi- 
ration of  twelve  months  notice  after  August  i,  1710,  and  the 
bank  was  authorized  to  issue  notes  to  the  amount  of  the  sub- 
scriptions for  the  new  loan,  provided  the  notes  were  made 
payable  to  bearer  on  demand.  It  was  declared  that  in 
case  of  default  in  redemption,  the  notes  might  be  paid  at  the 


1  First  Nine  Years  of  the  Bank  of  England,  88. 

2  McLeod,  Theory  and  Practice  of  Banking,  L,  479-484. 


FIRST  CENTURY  OF  7^HE  BANK  OF  ENGLAND.      89 

Exchequer  out  of  the  annuity  due  the  bank,  and  a  trace  of 
the  theory  of  the  legislation  of  1844  appears  in  the  provision 
that  all  notes  above  the  sum  of  ;£i,  200,000  were  to  bear  a 
distinguishing  mark.  The  new  subscriptions  for  the  capital 
amounted  to  ,£1,001,171;  and  .£200,000  in  bank-notes  and 
,£800,000  in  Exchequer  tallies,  which  were  both  below  par, 
were  taken  out  of  circulation.  The  notes  previously  issued 
had  borne  interest,  and  now  rose  above  par,  while  the  bank 
was  able  to  issue  non-interest  bearing  notes  which  circulated 
at  par.  The  subscriptions  to  the  additional  stock  in  1697 
seem  to  have  been  made  by  the  original  shareholders  and 
were  repaid  to  them  between  1697  and  1707  from  the  profits 
of  the  bank. 

The  government  was  again  in  serious  need  of  money  when 
the  charter  was  renewed  in  1708  until  August  i,  1732,  and 
the  bank  was  authorized  to  double  its  capital  of  ,£2,201,171, 
and  to  circulate  ,£2,500,000  in  Exchequer  bills.  The  next 
extension  of  the  charter  was  made  in  1713  (Statute  I.,  c.  n) 
and  continued  the  bank  until  twelve  months  notice  to  be 
given  after  August  i,  1742.  The  subscription  lists  for  the 
new  stock  were  opened  on  February  22,  1709,  and  the  whole 
sum  was  subscribed  before  one  o'clock.  The  bank  under 
this  arrangement  advanced  ,£400,000  to  the  government 
without  interest  and  surrendered  ,£1,500,000  in  Exchequer 
bills  to  be  cancelled,  upon  condition  of  receiving  an  annuity 
of  ,£106,501.  The  principal  of  both  these  items  was  added 
to  the  permanent  debt,  which  afterwards  became  the  basis 
of  the  note  circulation  of  the  bank.  Calls  for  additional 
capital  were  made  upon  the  stockholders  to  the  amount  of 
£656,204  in  1709  and  £"501,448  in  1710.  Several  of  the 
debts  of  the  government  to  the  bank  were  consolidated  in 
1716  and  reduced  from  six  to  five  per  cent.,  and  £"2,000,000 
in  Exchequer  bills  were  cancelled  in  1718  and  added  to  the 
permanent  debt  due  the  bank  by  the  government.  The 
settlement  of  the  affairs  of  the  South  Sea  Company  in  1721 
resulted  in  the  purchase  of  £"200,000  in  annuities  by  the 
bank  at  twenty  years'  purchase,  making  a  new  addition  to 
the  permanent  debt  of  £"4,000,000.  These  loans  increased 


90  HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

the  permanent  debt  to  ,£9,375,027,  exclusive  of  various  ad- 
vances of  a  different  character  which  had  been  repaid. 

The  South  Sea  Company  was  essentially  a  Tory  institution 
and  they  proposed  as  early  as  1717  to  increase  their  capital 
from  ,£10,000,000  to  ;£i2, 000,000  for  the  purpose  of  wiping 
out  the  debt  due  the  Bank  of  England  and  several  minor 
obligations.  The  bank  made  counter  propositions,  but  the 
real  contest  occurred  in  1719  and  1720  over  the  proposition 
of  the  South  Sea  directors  to  assume  the  entire  national  debt. 
It  was  estimated  at  ,£30, 981, 7 12  and  was  to  be  consolidated 
into  one  fund,  to  be  added  to  the  capital  of  the  company  at 
five  per  cent,  interest  annually.  The  company  proposed  to 
pay  a  bonus  of  ,£3,500,000  to  the  government  in  four  in- 
stalments, beginning  in  1721.  The  bank  met  this  remark- 
able proposition  by  an  offer  of  its  own  to  assume  the  entire 
debt  on  terms  which  were  calculated  to  be  about  ,£2,000,000 
more  advantageous  than  those  of  their  rivals.  The  South 
Sea  Company  obtained  three  days  to  amend  their  offer  and 
increased  the  bonus  to  .£7,567,500.  The  bank  rejoined  with 
another  offer  of  ,£1,700  in  bank  stock  for  every  annuity  of 
;£ioo  for  ninety-six  and  ninety-nine  years  and  the  reduction 
of  the  interest  on  the  consolidated  debt  after  June  24,  1727, 
to  four  per  cent. 

The  South  Sea  bill  passed  the  House  of  Commons  April  2, 
1720,  by  a  vote  of  172  to  55  and  passed  the  Lords  by  a  vote 
of  83  to  17.'  The  South  Sea  stock  was  forced  upward  to  a 
preposterous  figure  under  the  influence  of  the  same  fever  of 
speculation  which  raged  at  about  the  same  time  in  France 
over  the  Mississippi  scheme,  but  capital  was  soon  sunk  in 
this  and  other  unproductive  enterprises  and  the  reaction 
wrecked  the  credit  of  the  company  and  came  near  wrecking 
that  of  the  bank.  The  directors  of  the  South  Sea  Company 
appealed  to  the  bank  for  help,  goldsmiths  and  private  bank- 
ers began  to  fail,  and  a  run  upon  the  bank  itself  began,  which 
was  only  staved  off  by  payments  in  light  sixpences  and 
shillings  and  b)'  engaging  men  to  fill  up  the  line,  draw 


1  MacLeod,  Theory  and  Practice  of  Banking,  I.,  496-99. 


FfXST  CENTURY  OF   THE  BANK  OF  ENGLAND.      9! 

money  and  re-deposit  it  at  another  window.  Fortunately 
the  festival  of  Michaelmas,  during  which  the  bank  was 
usually  closed,  intervened  and  when  it  was  over  the  public 
alarm  had  subsided. 

The  bank  had  weathered  severe  storms,  had  seen  two 
powerful  rivals  crushed  and  its  own  monopoly  confirmed,  and 
justly  felt  that  it  had  proved  its  capacity  to  endure.  Thirty- 
eight  years  after  its  foundation,  on  Thursday,  August  3, 
1732,  the  corner-stone  of  a  new  building  was  laid  in  the 
presence  of  the  Governor  and  other  officials  of  the  bank  in 
Threadneedle  Street.  The  directors  moved  from  their  old 
quarters  in  Grocers'  Hall  on  June  5,  1734,  and  from  that  day 
"The  Old  Lady  of  Threadneedle  Street"  occupied  the 
massive  building  which  is  still  consecrated  to  her  use.1  A 
statue  of  King  William,  under  whom  the  first  charter  was 
granted,  stands  in  the  hall,  with  a  Latin  inscription  which 
accords  to  him  the  honor  of  official  founder  of  the  bank. 

When  the  time  approached  for  a  renewal  of  the  charter  in 
1742,  the  bank  advanced  ,£1,600,000  to  the  government 
without  interest  by  a  call  upon  their  proprietors  for  ,£840,- 
004,  which  raised  their  capital  stock  to  £9, 800,000.  The 
advance  without  interest  was  substantially  part  of  a  pro- 
cess of  conversion  by  which  the  interest  on  the  original 
advance  to  the  government  at  the  foundation  of  the  bank 
and  on  ,£400,000  advanced  in  1708  was  reduced  from  six  to 
three  per  cent.  The  bank  simply  continued  to  receive  the 
old  interest  payment,  but  doubled  the  principal  of  the  loan. 
The  charter  was  extended  at  this  time  until  twelve  months 
notice  after  August  i,  1764.  Another  adjustment  with  the 
government  in  1746  led  to  the  cancellation  of  ,£986,000  of 
Exchequer  bills,  upon  which  the  bank  was  to  receive  an 


1  The  buildings  have  been  much  enlarged  since  and  now  cover  the 
whole  area  between  Threadneedle  Street,  Princes  Street,  Lothbury 
and  Bartholomew  Lane, — a  space  of  more  than  three  acres.  The 
bank  originally  employed  about  fifty  clerks,  but  the  number  is  now 
about  fifteen  hundred  and  the  pay-roll  amounts  to  about  ^300,000, 
exclusive  of  ^50,000  paid  annually  in  pensions. — H.  J.  W.  Dam, 
The  Bank  of  England,  McClure's  Magazine,  IV.  460. 


92  HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

annuity  of  four  per  cent.,  and  a  call  upon  the  proprietors  for 
ten  per  cent.,  which  made  the  bank  capital  ^10,780,000. 
The  rate  of  interest  on  portions  of  the  debt  amounting  to 
,£8,486,000,  which  had  not  yet  been  reduced,  was  changed 
to  three  and  a  half  per  cent,  in  1749  for  the  seven  years 
beginning  with  Christmas,  1750,  and  thereafter  to  three  per 
cent.  1  The  charter  was  renewed  in  1764  until  twelve  months 
notice  after  August  i,  1786,  upon  the  conditions  of  a  direct 
payment  to  the  Exchequer  of  ,£110,000  and  a  loan  for  two 
years  on  Exchequer  bills  of  ,£1,000,000  at  three  per  cent.  The 
next  renewal,  in  1781,  carried  the  charter  along  until  twelve 
months  notice  after  August  i,  1812,  and  provided  for  a  loan 
for  three  years  of  ,£2,000,000  at  three  per  cent.  A  call  upon 
the  proprietors  for  ,£862,400  in  1782  advanced  the  capital  of 
the  bank  to  ,£11,642,400,  at  which  it  remained  until  1816, 
when  it  was  increased  to  ,£14,553,000  by  adding  twenty-five 
per  cent,  to  the  stock  of  each  proprietor  from  the  reserved 
profits  or  "rest." 

The  Bank  of  England  at  its  institution  enjoyed  no  monop- 
oly of  note  issues,  so  that  Chamberlain's  plan  for  a  Land 
Bank  was  not  a  violation  of  the  privileges  of  the  older  estab- 
lishment. The  managers  of  the  Bank  of  England  endeavored 
to  protect  themselves  in  the  legislation  of  1697  an(i  secured 
a  provision  that  during  the  continuance  of  the  corporation 
no  other  institution  in  the  nature  of  a  bank  should  be  erected 
or  countenanced  within  the  Kingdom  by  act  of  Parliament 
by  bodies  exceeding  six  persons.  This  provision  was  calcu- 
lated to  prevent  the  formation  of  strong  joint  stock  banks, 
and  dangerous  rivalry  was  not  feared  from  private  firms  of 
six  persons  with  unlimited  liability.  An  effort  to  narrow 
the  limits  still  more  closely  was  made  in  the  Act  of  1709  by 
making  it  unlawful  "  for  any  body  politic  or  corporate  what- 
soever, created  or  to  be  created  (other  than  the  said  Gover- 
nor and  Company  of  the  Bank  of  England),  or  for  any  other 

1  The  operation  of  1752,  by  which  the  balance  of  annuities  granted 
in  1721  were  consolidated  with  other  three  per  cent,  stocks,  gave  rise 
to  the  familiar  designation,  "  Three  per  cent,  consols,"  the  latter  word 
being  a  contraction  of  "consolidated." — Gilbart,  I.,  43- 


FIRST  CENTURY  OF  THE  BANK  OF  ENGLAND.      93 

persons  whatsoever,  united  or  to  be  united  in  covenants  or 
partnership,  exceeding  the  number  of  six  persons,  in  that 
part  of  Great  Britain  called  England,  to  borrow,  owe,  or 
take  up  any  sum  or  sums  of  money  on  their  bills  or  notes, 
payable  at  demand,  or  at  any  less  time  than  six  months  from 
the  borrowing  thereof."  This  clause  was  repeated  in  1716, 
when  the  usury  laws  were  suspended  as  to  the  Bank  of 
England  and  the  directors  were  authorized,  ' '  at  their  own 
good  liking ' '  to  borrow  or  take  up  .money  at  any  rate  of 
interest  they  pleased.  The  conception  of  banking  at  this 
time  involved  necessarily  the  privilege  of  issuing  circulating 
notes,  and  it  was  determined  to  close  all  loop-holes  in  this 
matter  upon  the  renewal  of  the  charter  in  1742.  It  was 
accordingly  provided  (15  George  II. ,  c.  13,  s.  5)  : 

And  to  prevent  any  doubts  that  may  arise  concerning  the  privi- 
lege or  power  given  by  former  Acts  of  Parliament,  to  the  said  Governor 
and  Company  of  exclusive  banking,  and  also  in  regard  to  the  erecting 
of  any  other  bank  or  banks  by  Parliament,  or  restraining  other  per- 
sons from  banking  during  the  continuance  of  the  said  privilege 
granted  to  the  Governor  and  Company  of  the  Bank  of  England,  as 
before  recited,  it  is  hereby  further  enacted  and  declared,  by  the 
authority  aforesaid,  that  it  is  the  true  intent  and  meaning  of  the  Act 
that  no  other  bank  shall  be  erected,  established  or  allowed  by  Parlia- 
ment, and  that  it  shall  not  be  lawful  for  any  body  politic  or  corporate 
whatsoever,  erected  or  to  be  erected,  or  for  any  other  persons  what- 
soever, united  or  to  be  united,  in  covenants  or  partnership,  exceeding 
the  number  of  six  persons,  in  that  part  of  Great  Britain  called  England, 
to  borrow,  owe,  or  take  up  any  sum  or  sums  of  money,  on  their  bills 
or  notes,  payable  at  demand,  or  at  any  less  time  than  six  months 
from  the  borrowing  thereof  during  the  continuance  of  such  said  privi- 
lege of  the  said  Governor  and  Company,  who  are  hereby  declared 
to  be  and  remain  a  corporation  with  the  privilege  of  exclusive  bank- 
ing, as  before  recited. 

This  limitation  upon  the  power  of  other  corporations  did 
not  prevent  the  issue  of  promissory  notes  and  checks ;  nor 
did  it  prevent  the  issue  of  bank-notes  by  individuals  and 
firms  of  not  exceeding  six  persons.  The  opportunity  which 
this  afforded  for  the  creation  of  joint  stock  banks  of  dis- 
count and  deposit  was  not  understood  and  availed  of  till 


94  HISTORY  OP  MODERN  BANKS  OF  ISSUE. 

much  later,  but  the  opportunity  for  the  issue  of  circulating 
notes  by  individuals  and  small  firms  was  availed  of.  The 
notes  of  the  Bank  of  England  had  little  circulation  outside 
of  London  and  the  rapid  development  of  canal  building  and 
other  enterprises  during  the  last  half  of  the  eighteenth  cen- 
tury created  a  demand  for  a  larger  credit  currency.  Professor 
MacLeod  declares,  in  speaking  of  the  principle  of  monopoly 
embodied  in  the  charter  of  1697,  that  "The  frightful  con- 
vulsions and  collapses  of  public  credit  which  have  taken 
place  during  the  last  three-quarters  of  a  century  are  chiefly 
due  to  this  great  wrong."  l  The  effect  was  not  felt  until 
nearly  a  century  later,  when  England  began  to  take  her 
place  at  the  head  of  the  commercial  nations,  but  after  the 
crisis  of  1782  "  multitudes  of  miserable  shopkeepers  in  the 
country,  grocers,  tailors,  drapers,  started  up  like  mushrooms 
and  turned  bankers,  and  issued  their  notes,  inundating  the 
country  with  their  miserable  rags."  Burke  said  that  when 
he  came  to  England  in  1750  there  were  not  twelve  bankers 
out  of  London  ;  in  1793  there  were  nearly  four  hundred. 
The  Bank  of  England  began  to  issue  notes  for  £10  and  ^15 
as  early  as  1759,  but  the  private  bankers  issued  them  for 
smaller  amounts,  and  in  1775  an  act  was  passed  to  prohibit 
notes  of  less  than  twenty  shillings,  and  two  years  afterwards 
the  limit  was  raised  to  ^5. 

The  prohibition  upon  note  issues  was  probably  one  of  the 
causes  which  contributed  to  the  use  of  checks.  The  notes 
issued  by  private  bankers  were  at  first  written  on  paper  for 
any  odd  sum,  like  promissory  notes.  The  practice  was  in- 
troduced by  Child  and  Co.,  in  1729,  of  having  the  notes 
partly  printed  and  partly  written,  like  a  modern  check. 
These  notes  continued  to  be  issued  till  about  1793,  when  the 
existing  system  was  introduced,  of  giving  the  depositor  a 
credit  for  the  full  amount  of  his  deposit  and  authorizing  him 
to  draw  checks  at  his  convenience  against  it.8  The  issue  of 

1  Theory  and  Practice  of  Banking^  I.,  479. 

2  MacLeod,    Theory  and  Practice  of  Banking,   I.,  331,  515.     M. 
Juglar  (343)  says  that  the  use  of  checks  replaced  the  use  of  bills  in 
1772. 


FIRST  CENTURY  OF  THE  BANK   OF  ENGLAND.      95 

notes  by  private  bankers  was  not  forbidden  until  the  Bank 
Act  of  1844,  but  their  use  gradually  diminished  as  the 
greater  convenience  of  checks  came  to  be  understood.  The 
Act  of  1742  would  probably  have  prohibited  joint  stock  banks 
of  discount  and  deposit,  if  it  had  been  supposed  that  they 
could  be  carried  on  without  the  issue  of  notes,  but  note 
issues  were  then  regarded  as  a  necessary  part  of  successful 
banking. 

The  Bank  of  England  had  to  face  serious  financial  crises 
in  1772,  1782,  and  1792.  Their  policy  in  1772  and  1782  was 
to  support  credit  and  to  make  advances  to  solvent  merchants, 
with  the  result  that  the  foreign  exchanges  turned  in  their 
favor  and  general  bankruptcy  was  avoided.  Mr.  Bosanquet 
was  Governor  of  the  bank  and  he  adopted  the  policy  of  con- 
tracting issues  while  the  drain  of  specie  was  going  on  and 
expanding  them  when  the  tide  turned.  The  crisis  of  1793 
was  precipitated  by  the  breaking  out  of  war  with  France, 
and  was  quickly  followed  by  the  stoppage  of  about  one  hun- 
dred country  banks  and  the  serious  embarrassment  of  many 
others.  The  directors  of  the  bank  became  alarmed,  refused 
credit  to  strong  houses  and  created  a  great  scarcity  in  the 
circulating  medium  by  the  discredit  cast  on  the  notes  of  the 
country  banks.  The  policy  of  contracting  issues  was  not 
justified  by  the  state  of  the  exchanges,  for  gold  and  silver 
were  pouring  into  England  from  France  in  consequence  of 
the  issue  of  the  assignats,  which  rapidly  drove  coin  out  of 
circulation,  and  exchange  was  favorable  with  both  Amster- 
dam and  Hamburg.  The  absolute  refusal  of  the  bank  to 
lend  its  support  to  credit  compelled  the  issue  of  Exchequer 
bills  by  the  government,  which  quickly  improved  the  situa- 
tion. 

The  long  suspension  of  .specie  payments  during  the  wars 
with  France  was  brought  about  by  the  reckless  and  un- 
scrupulous course  of  Mr.  Pitt,  who  dictated  the  entire 
policy  of  the  government.  The  relations  of  the  bank  with 
the  government  had  grown  closer  from  year  to  year  since 
1718,  when  subscriptions  to  public  loans  were  first  received 
there,  as  affording  greater  convenience  than  the  Treasury. 


96  HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

The  bank  soon  after  began  to  make  advances  of  money  in 
anticipation  of  the  land  and  malt  taxes,  and  upon  Exchequer 
bills  and  other  securities.1  They  did  this  in  the  face  of  the 
provision  of  the  charter  of  1694,  that  if  they  should  advance 
any  money  to  the  Crown  whatever,  except  by  the  special 
permission  of  Parliament,  they  should  forfeit  treble  the  value 
of  all  such  advances.  The  usual  limit  of  these  temporary 
advances  was  ,£20,000  or  ,£30,000  and  it  became  a  subject 
of  complaint  if  the  amount  was  increased  to  ,£50,000.  The 
limit  was  stretched  in  the  American  war  to  ,£150,000  and 
Mr.  Bosanquet  in  1793  became  uneasy  as  to  the  legality  of 
such  advances  without  authority  of  Parliament.  The  direc- 
tors, therefore,  applied  for  an  act  of  indemnity  for  past 
advances  and  permission  to  make  them  in  the  future  to  a 
limited  amount,  not  to  exceed  ,£100,000.  Mr.  Pitt  readily 
agreed  to  bring  in  a  bill  for  this  purpose,  but  he  quietly 
dropped  the  limitation  and  passed  the  measure  in  this  form 
through  Parliament.  He  was  now  armed  with  absolute 
power  to  draw  upon  the  bank,  unless  the  directors  should 
refuse  to  honor  his  bills,  and  he  was  neither  conservative  nor 
scrupulous  in  the  use  of  the  power. 

Mr.  Pitt  availed  himself  of  the  new  law  to  scatter  gold 
broadcast  over  Europe  to  promote  the  combination  against 
France,  with  the  result  of  draining  the  country  of  specie  and 
creating  unfavorable  foreign  exchanges.  He  drew  heavily 
upon  the  bank  and  drove  them  into  such  close  quarters  that 
they  passed  a  resolution  on  January  15,  1795,  that  the  Chan- 
cellor of  the  Exchequer  must  make  his  financial  arrange- 
ments for  the  year  without  expecting  further  assistance  from 
them  than  advances  on  Treasury  bills  not  exceeding  ,£500,- 
ooo  at  any  one  time.  Mr.  Pitt  promised  to  reduce  the  exist- 
ing advances  to  that  amount  by  payments  out  of  the  first 
loan  which  was  in  process  of  subscription,  but  he  paid  little 
attention  to  such  promises.  The  bank  was  compelled  by  the 
demands  of  the  government  to  expand  its  issues  in  the 
face  of  unfavorable  exchanges  until  in  February,  1795,  they 


1  Gilbart,  I.,  36. 


FIRST  CENTURY  OF  THE  BANK  OF  ENGLAND.      97 

reached  ^14,000,000.  The  drain  of  gold  set  in  strongly  in 
September,  the  price  of  gold  in  bank-notes  rose  to  ^4  2s.  per 
ounce  (about  five  shillings  above  parity,  which  was  ^3  175. 
10^^.),  and  the  directors  of  the  bank  were  compelled  to 
sharply  restrict  their  discounts.  They  gave  notice  on  De- 
cember 31,  1795,  that  if  the  applications  for  discounts  on  any 
day  exceeded  the  sum  to  be  advanced,  a  pro  rata  proportion 
of  each  applicant's  bills  should  be  returned,  "without  regard 
.to  the  respectability  of  the  party  sending  in  the  bills  or  the 
solidity  of  the  bills  themselves."  *  Matters  went  from  bad 
to  worse  until  February  n,  1796,  when  the  court  of  directors 
adopted  the  resolution  : 

That  it  is  the  opinion  of  the  Court,  founded  upon  its  experience  of 
the  effects  of  the  late  Imperial  loan,  that  if  any  further  loan  or  ad- 
vance of  money  to  the  Emperor,  or  other  foreign  state,  should  in  the 
present  state  of  affairs,  take  place,  it  will  in  all  probability  prove  fatal 
to  the  Bank  of  England. 

The  Court  of  Directors  do  therefore  most  earnestly  deprecate  the 
adoption  of  any  such  measure,  and  they  solemnly  protest  against  any 
responsibility  for  the  calamitous  consequences  that  may  follow  there- 
upon. 

Mr.  Pitt  replied  that  after  the  repeated  promises  he  had 
made  he  saw  no  occasion  for  the  resolutions  and  should  re- 
gard them  as  having  been  adopted  in  a  moment  of  needless 
alarm.  This  did  not  prevent  him  from  continuing  secret  re- 
mittances to  the  Continent,  but  suspension  of  specie  pay- 
ments was  staved  off  until  the  next  year  by  the  restriction 
of  accommodation  to  merchants  and  the  favorable  crops  of 
1796.  The  advances  upon  Treasury  bills  amounted  on  June 
14,  1796,  to  /i,  232, 649  and  Mr.  Pitt  demanded  ,£800,000 
more  in  July  and  a  like  sum  in  August.  The  bank  re- 
fused the  second  demand  but  granted  a  request  by  Mr.  Pitt 
in  November  for  ^2,750,000,  on  condition  that  the  advances 
on  Treasury  bills  should  be  paid  out  of  this  loan.  "Mr. 
Pitt,"  in  the  terse  language  of  Professor  MacLeod,  "took 
the  money  but  never  paid  off  the  bills."  a 

1  Gilbart,  I.,  45. 

2  Theory  and  Practice  of  Banking,  I.,  524. 


98  ti/STORY  Of  MODERtf  &ANKS  OF  ISSUE. 

The  landing  of  a  French  frigate  in  one  of  the  Welsh  har- 
bors and  orders  from  the  government  to  the  farmers  to  drive 
their  stock  into  the  interior,  caused  a  run  upon  the  Bank  of 
England  which  finally  brought  the  long  dreaded  catastrophe 
of  suspension  of  payment  in  coin.  The  bank  had  been  mak- 
ing frantic  efforts  for  several  weeks  to  contract  their  issues  and 
had  reduced  them  from  .£10,550,830  on  January  21,  1797,  to 
,£8,640,250  on  February  25th,  but  their  cash  was  reduced  on 
the  latter  date  to  .£1,272,000.  The  cabinet  met  the  next  day, 
which  was  Sunday,  and  issued  an  Order  in  Council,  "That 
the  directors  of  the  Bank  of  England  should  forbear  issuing 
any  cash  in  payment  until  the  sense  of  Parliament  can  be 
taken."1  A  meeting  of  merchants  was  held  on  Monday, 
with  the  Lord  Mayor  in  the  chair,  which  adopted  a  resolu- 
tion similar  to  that  adopted  on  the  successes  of  the  Pretender 
in  Scotland  in  1745,  that  "  we  will  not  refuse  to  receive  bank- 
notes in  payment  of  any  sum  of  money  to  be  paid  us,  and 
we  will  use  our  utmost  endeavors  to  make  all  our  payments 
in  the  same  manner."  A  select  committee  was  appointed 
by  Parliament  to  inquire  into  the  bank's  affairs,  and  found 
them  in  a  prosperous  condition  except  for  the  scarcity  of  coin 
and  bullion.  Their  assets  were  ,£17,597,280,  representing  a 
surplus  of  ,£3,826,890,  exclusive  of  the  government  debt  of 
^"11,686,800,  which  paid  three  per  cent.  Suspension  of  pay- 
ments was  enacted  until  June  24th  and  the  bank  was  au- 
thorized to  issue  notes  under  ,£5.  The  bank-notes  were 
made  legal  tender  and  were  to  be  received  at  par  in  the 
payment  of  taxes.  The  bank  was  authorized  to  receive 
special  deposits  in  coin  in  exchange  for  notes  and  to  repay 
three-fourths  of  the  amount  in  coin  if  demanded.  The  re- 
striction was  prolonged  on  June  22d  to  one  month  after  the 
meeting  of  the  next  session  of  Parliament  and  was  again 
prolonged  on  November  3oth,  at  the  next  session,  until  six 
months  after  the  conclusion  of  a  definitive  treaty  of  peace. 

The  policy  of  the  bank  in  restricting  commercial  discounts, 
though  forced  upon  it  in  a  measure  by  the  demands  of  the 

1  Levi,  74. 


FIRST  CENTURY  OF  THE  BANK  OF  ENGLAND.      99 

government,  was  the  cause  of  serious  complaint  in  the  mer- 
cantile community  and  led  to  much  discussion  of  other 
methods  of  meeting  the  demand  for  credit.  The  bank  re- 
fused to  establish  branches  in  the  country  and  their  charter 
prohibited  any  other  strong  company  from  doing  so.  The 
very  policy  of  restricting  their  issues  in  the  autumn  of  1796, 
which  the  directors  regarded  as  a  measure  of  extreme  pre- 
caution, intensified  the  demand  for  gold  by  creating  a  scarcity 
of  currency  which  led  to  the  withdrawal  of  gold  by  deposi- 
tors. The  irritation  among  the  merchants  was  such  that  a 
meeting  was  held  in  London  Tavern  on  April  2,  1796,  which 
appointed  a  committee  to  devise  a  plan  to  restore  the  circulat- 
ing medium,  if  practicable  without  infringing  the  monopoly 
of  the  bank.  Mr.  Walter  Boyd,  an  eminent  merchant,  drew 
up  a  report  on  behalf  of  the  committee,  authorizing  a  board 
of  twenty-five  members  to  be  named  by  Parliament  to  issue 
circulating  promissory  notes  upon  deposits  of  coin,  bank- 
bills,  and  commercial  paper. 1  The  committee  were  persuaded 
by  the  Chancellor  of  the  Exchequer  to  delay  action  and  noth- 
ing ever  came  of  their  plan,  but  it  was  the  opinion  of  Mr. 
Boyd  that  the  public  stocks  suffered  as  well  as  commercial 
paper  by  the  scarcity  of  currency  and  the  necessity  of  forced 
sales  of  securities  to  obtain  it.  Sir  William  Pulteney,  during 
the  debate  on  the  bill  authorizing  the  suspension  of  cash 
payments,  asked  leave  to  bring  in  a  bill  for  another  bank  if 
the  Bank  of  England  did  not  resume  on  June  24,  1797,  as 
was  then  proposed.  The  proposition  was  defeated  at  the 
time  but  gained  such  strength  within  the  next  two  years 
that  public  meetings  were  held  and  pamphlets  written  in  its 
support.  The  bank  directors  became  alarmed,  and  as  gov- 
ernment was  still  pressing  for  money,  they  offered  .£3,000,- 
ooo  without  interest  for  six  years  as  the  price  of  a  renewal 
of  the  charter.  Mr.  Pitt  accepted  the  terms  and  passed  a 
bill  in  1800  extending  the  monopoly  of  the  bank  for  twenty- 
one  years  after  1812,  or  until  1833. 

1  MacLeod,  Theory  and  Practice  of  Banking,  I.,  523. 


CHAPTER   V. 

SECOND    CENTURY    OF  THE    BANK  OF  ENGLAND. 

The  Continued  Suspension  of  Specie  Payments — The  Bullion  Report 
and  the  Act  of  1819 — The  Contest  against  the  Monopoly  of  the 
Bank  of  England  and  the  Rise  of  the  Joint  Stock  Banks — The 
Bank  Act  of  1844 — Theory  of  its  Operation  and  its  Failure  to 
Carry  Out  the  Theory — The  Recent  Accumulation  of  Gold  in 
the  Bank. 

THE  great  events  of  the  second  century  of  the  history  of 
the  Bank  of  England  have  been  the  resumption  of 
cash  payments,  the  restriction  of  circulation  by  the 
Bank  Act  of  1844,  and  the  recent  accumulation  of  gold  in 
the  custody  of  the  bank.  The  Act  of  1844  has  been  the 
turning  point  of  almost  infinite  discussion  of  the  theory  and 
practice  of  banking  in  England,  but,  whatever  its  merits  or 
defects,  it  has  not  destroyed  the  character  of  the  Bank  of 
England  as  the  guardian  of  the  cash  reserve  of  the  country, 
nor  prevented  London  from  becoming  the  centre  of  the 
exchanges  of  the  world.  Freedom  from  danger  of  invasion, 
the  development  of  banking  and  credit  beyond  any  point 
attained  elsewhere,  a  market  free  to  the  world's  commerce, 
and  a  single  fixed  standard  of  value  have  raised  England  to 
supremacy  among  commercial  countries  and  linked  the  his- 
tory of  her  financial  progress  in  some  degree  with  that  of  all 
other  nations. 

The  British  nation  was  far  from  her  present  position  at 
the  close  of  the  Napoleonic  wars.  Political  and  military 
triumphs  had  come  to  her,  but  they  had  been  at  the  expense 
of  the  crippling  of  her  merchant  marine,  the  increase  of  her 

100 


SECOND   CENTURY  OF  THE  BANK  OF  ENGLAND.    IOI 

debt  to  $4, ocx), 000,000,  and  the  suspension  of  payments  in 
specie.  The  Bank  of  England  by  prudent  management 
kept  its  notes  for  several  years  at  par  with  coin  and  the 
depreciation  was  at  first  so  gradual  as  hardly  to  be  noticed. 
One  of  the  elements  of  confusion  in  the  discussion  of  the 
effect  of  the  restriction  of  specie  payments  was  the  fact  that 
bank-notes  became  the  sole  medium  of  ordinary  transactions. 
The  issue  of  £i  notes  by  the  bank  drove  the  gold  from  cir- 
culation even  before  the  depreciation  of  the  paper  and  made 
metal  only  a  subsidiary  money.  If  an  effort  had  been  made 
to  keep  the  circulation  saturated  with  coin  by  continuing 
the  prohibition  upon  notes  below  ^"5,  the  depreciation  of 
the  paper  would  have  been  quickly  felt  by  the  disappearance 
of  gold  and  accurately  measured  by  the  premium  upon  gold. 
The  fact  that  the  paper  was  maintained  at  a  substantial 
parity  with  gold  for  nearly  ten  years  while  gold  disappeared 
from  circulation,  misled  those  who  did  not  look  to  the  simple 
and  indisputable  facts  regarding  the  foreign  exchanges  which 
were  stated  in  the  celebrated  Bullion  Report  of  1810.  Silver 
had  been  rapidly  disappearing  from  circulation  for  some 
years,  because  the  English  mint  ratio  gave  it  a  less  value 
in  relation  to  gold  than  the  market  price.  The  country 
bankers  were  authorized  by  the  restriction  laws  to  redeem 
their  notes  in  Bank  of  England  notes  in  exactly  the  same 
manner  as  they  had  formerly  done  in  specie,  so  that  the  ex- 
pansion and  contraction  of  the  country  note  issues  was  in  a 
measure  placed  in  the  hands  of  the  central  bank  as  well  as 
the  control  of  its  own  circulation. 

Bullion  rapidly  accumulated  in  the  bank  after  the  suspension 
of  specie  payments  and  the  bank  announced  their  willingness 
on  January  3,  1799,  to  redeem  sums  under  ^5  and  to  pay  in 
full  after  February  ist,  notes  for  £i  and  £2,  dated  prior  to 
July  i,  I798.1  The  bank  then  held  ^7, 000,000  in  coin  and 
bullion  and  had  increased  its  note  issues  to  ^16,000,000.  The 
government  were  not  willing  to  take  the  risk  of  resumption 
and  continued  the  restriction  even  after  the  peace  of  Amiens, 


1  Gilbart  I.,  49. 


102          HISTORY   OF  MODERN  BANKS  OF  ISSUE. 

when  the  bank  again  declared  that  it  was  well  supplied  with 
cash  and  was  ready  to  resume.  A  bill  was  brought  in  on 
April  9,  1802,  only  thirteen  days  after  the  signature  of  the 
definitive  treaty,  to  continue  the  restriction  until  March  i, 
1803,  and  the  restriction  was  continued  again  on  February  28, 
1803,  until  six  weeks  after  the  beginning  of  the  next  session 
of  Parliament.  War  broke  out  before  this  date  arrived  and 
the  restriction  was  continued  until  six  months  after  the 
ratification  of  a  definitive  treaty  of  peace.  No  such  treaty 
was  ratified  until  after  the  abdication  of  Napoleon  in  the 
spring  of  1814,  when  the  problem  of  restriction  was  again 
taken  up. 

The  price  of  gold  began  to  rise  in  September,  1799,  and 
in  June,  1800,  had  reached  ^4  55.  per  ounce,  which  was  about 
seven  shillings  above  the  mint  price.1  Exchange  with  Ham- 
burg fell  and  the  unfavorable  state  of  the  exchanges  was 
made  an  excuse  for  postponing  the  resumption  of  specie 
payments  after  the  peace  of  Amiens.  The  fact  that  the  un- 
favorable exchange  was  due  to  the  depreciation  of  the  cur- 
rency was  denied  or  evaded  by  the  Parliamentary  leaders 
and  Mr.  Addington,  the  Chancellor  of  the  Exchequer,  urged 
that  the  restriction  be  continued  because,  ' '  for  several  months 
past,  there  has  been  a  trade  carried  on  for  purchase  of  guineas 
with  a  view  to  exportation." 


1  The  mint  price  of  gold  was  £$  175.  lo^d.,  which  was  four  and  a 
half  pence  above  the  market  price,  in  order  to  cover  the  cost  of  coin- 
age and  the  loss  of  interest  while  the  bullion  was  detained  in  the 
mint.  The  value  of  gold  coins  was  fixed  as  they  exist  to-day  in  1717, 
when  it  became  necessary,  upon  the  recommendation  of  Sir  Isaac 
Newton,  to  reduce  the  coining  value  of  the  gold  in  the  guinea  to  arrest 
the  exportation  of  silver.  The  reduction  made  the  ratio  of  gold  to 
silver  about  fifteen  and  a  quarter  to  one,  but  as  the  ratio  in  France 
and  Holland  was  about  fourteen  and  a  half,  it  continued  to  be  profit- 
able to  export  silver  from  England  to  those  countries  and  to  import 
gold  into  England.  Silver  disappeared  from  circulation,  gold  became 
the  sole  metallic  medium  of  exchange,  because  it  was  the  cheaper 
metal  at  the  legal  ratio,  and  the  law  of  1816,  which  gave  England  the 
gold  standard,  simply  recognized  in  law  what  had  been  the  fact  prior 
to  the  suspension  of  cash  payments. 


SECOND  CENTURY  OF  THE  BANK  OF  ENGLAND.    103 

An  object  lesson  in  the  effects  of  a  depreciated  currency 
was  afforded  the  English  people  by  the  condition  of  affairs 
in  Ireland,  which  had  a  currency  of  her  own.  The  Irish 
shilling  contained  thirteen  pence,  and  as  the  pound,  both 
English  and  Irish,  contained  two  hundred  and  forty  pence, 
English  money  was  more  valuable  than  Irish  in  the  propor- 
tion of  ;£ioo  to  £  1 08  6s.  &/.  The  par  of  exchange  between 
England  and  Ireland  was  therefore  called  eight  and  one  third. 
The  Bank  of  Ireland  was  directed  to  suspend  specie  pay- 
ments at  the  same  time  as  the  Bank  of  England,  and  exchange 
was  maintained  at  a  point  favorable  to  Ireland  until  the 
autumn  after  the  passage  of  the  restriction  act  in  England. 
Exchange  then  began  to  fall,  which  made  it  unfavorable  to 
Ireland,  until  in  January,  1804,  it  had  reached  a  depression 
of  ^18  in  the  hundred.  The  bank  had  been  increasing  its 
issues  until  they  were  more  than  four  times  the  amount  at 
the  time  of  the  restriction.  A  committee  of  Parliament  was 
appointed  in  1804  to  consider  the  subject  and  they  found 
that  the  exchanges  were  nominally  unfavorable  because  of 
the  depreciation  of  the  Irish  paper.  The  directors  of  the 
Bank  of  Ireland  who  appeared  before  the  committee  would 
not  admit  that  this  was  the  case  and  maintained  that  the 
large  issues  of  paper  money  were  to  supply  the  place  of 
gold  which  had  been  taken  out  of  the  country  to  pay  remit- 
tances. One  of  them  advanced  the  same  extraordinary 
doctrine  advanced  a  few  years  later  in  England,  that  "the 
mere  buying  of  gold  at  an  advanced  price  beyond  that  of  the 
mint,  is  the  effect,  and  not  the  cause  of  the  exchange,  and, 
therefore,  no  proof  of  the  depreciation  of  the  paper  itself." 

The  committee  refused  to  be  misled  by  this  sort  of  argu- 
ment and  found  that  the  real  exchange,  when  allowance  was 
made  for  the  depreciation  in  the  paper,  was  favorable  to 
Ireland.  A  convincing  proof  that  it  was  so,  if  there  were  no 
others,  was  found  in  the  fact  that  the  exchanges  between 
England  and  Belfast  were  favorable  to  Belfast,  because  pay- 
ments at  Belfast  were  made  in  specie,  at  the  very  moment 
that  they  were  unfavorable  at  Dublin,  where  paper  was  the 
standard.  Still  further  demonstration  of  the  simple  mathe- 


104         HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

matical  proposition,  that  the  fall  in  the  exchange  was 
measured  by  the  depreciation  in  the  paper  money,  and  not  by 
any  cause  common  to  Irish  industry  or  banking,  was  afforded 
by  the  fact  that  there  was  a  local  difference  of  exchange  be- 
tween Dublin  and  Belfast,  which  put  specie  at  a  premium  of 
ten  or  twelve  per  cent,  in  Dublin,  while  it  passed  at  par  in 
Belfast  as  the  only  medium  of  exchange.1  The  committee 
recommended  that  the  relations  between  the  currencies  of 
the  two  countries  be  simplified  by  making  the  notes  of  the 
Bank  of  Ireland  payable  in  Bank  of  England  paper  and  that 
the  Bank  of  Ireland  establish  a  fund  in  London  for  that  pur- 
pose. Little  attention  seems  to  have  been  paid  to  this  report 
and  the  recommendation  that  the  currencies  be  assimilated, 
which  was  made  by  Mr.  Parnell  in  Parliament  in  1809,  was 
rejected  without  a  division. 

The  depreciation  of  the  Bank  of  England  notes  did  not 
advance  rapidly  until  the  period  of  commercial  speculation 
which  caused  the  panic  of  1810.  The  price  of  gold  in  bank 
paper,  which  had  risen  to  ^4  55.  per  ounce  in  1800,  fell  back 
to  about  ^4,  representing  a  depreciation  of  two  and  a  half 
shillings  or  about  three  and  two-tenths  per  cent.,  and  re- 
mained at  substantially  this  figure  until  1809.  The  price  of 
gold  rapidly  advanced  during  the  following  year  until  the 
mint  price  of  gold  was  £4.  us.  or  a  depreciation  of  17.4  per 
cent.  Exchange  with  Hamburg  had  been  falling  with  the 
depreciation  of  the  currency  and  on  February  i,  1810,  Mr. 
Horner  moved  for  several  accounts  relating  to  the  currency 
and  exchanges.  The  committee  was  then  appointed  whose 
work  has  become  so  famous  in  the  literature  of  finance  as 
the  Bullion  Report.  The  committee,  in  an  endeavor  to  ascer- 
tain the  true  cause  of  the  unfavorable  exchanges,  examined 
a  large  number  of  witnesses,  including  directors  of  the  Bank 
of  England,  private  bankers,  business  men,  and  students  of 
finance.  The  conclusions  of  the  committee,  however,  were 
directly  adverse  to  the  opinions  of  the  bankers  and  in  accor- 
dance with  those  of  the  most  enlightened  students  of  the 
abstract  problems  of  finance  and  political  economy. 

1  MacLeod,  Theory  and  Practice  of  Banking,  II. ,  14. 


SECOND   CENTURY  OF  THE  BANK   OF  ENGLAND.    1 05 

The  report  which  the  committee  presented  to  the  House 
of  Commons  took  its  place  at  once  among  the  classics  of 
finance  and  has  been  one  of  the  guides  of  sound  banking 
from  that  time  to  this.  It  is  a  remarkable  fact  that  Mr. 
Horner  was  a  young  man  of  thirty-two  who  had  never  given 
more  than  a  general  attention  to  financial  subjects.  He 
simply  listened  attentively  to  the  testimony  of  the  best  ex- 
perts who  appeared  before  the  committee  and  with  singular 
clearness  of  vision  grasped  the  correct  principles  of  regulating 
a  banking  currency  and  discarded  the  shallow  sophistries 
and  ' '  practical  rules  ' '  which  were  presented  to  him  by  the 
great  bankers  of  London. '  The  Bullion  Report  is  remarkable 
not  only  for  the  clearness  and  precision  with  which  it  lays 
down  the  fundamental  rules  for  regulating  the  volume  of  a 
paper  currency,  but  for  the  discriminating  judgment  with 
which  it  discusses  limitations  of  the  then  existing  theories 
of  prices  and  currency  which  only  came  to  be  generally 
accepted  by  political  economists  a  generation  later  and  have 
not  been  accepted  by  all  of  them  to-day.3 

The  undisputed  facts  upon  which  the  bullion  committee 
based  their  report  are  summed  up  by  Professor  MacLeod  as 
follows 3  : 


1  M.  Juglar  remarks  that,  "  There  is  always  something  which  blinds 
those  the  best  placed  to  see,  and  it  is  not  the  persons  engaged  in 
affairs  who  are  the  best  judges  of  the  mechanism  they  direct  or  which, 
rather,  sweeps  them  along." — Des  Crises  Commerciales,  341.     For 
similar  views  see  Price,  Currency  and  Banking,  3-4  ;  Bagehot,  Lorn- 
bard  Street,  Works,  V.,  112-15. 

2  Mr.  Horner  himself  expressed  a  modest  opinion  of  the  literary 
merits  of  the  report,  but  declared  that  it  possessed  one  great  merit, 
"  That  it  declares  in  very  plain  and  pointed  terms  both  the  true  doc- 
trine, and  the  existence  of  a  great  evil  growing  out  of  the  neglect  of 
that  doctrine."     Portions  of  the  report  were  written   by  Mr.  Hus- 
kisson  and  Mr.  Thornton,   but  the  inspiring  spirit  was  largely  Mr. 
Horner's.     The  views  set  forth  were  not  new  and  had  been  so  clearly 
stated  by  Mr.  Ricardo  in  his  pamphlet  on   "The  High  Price  of 
Bullion,"  that  some  of  Mr.  Ricardo's  friends  accused  Mr.  Horner 
of  borrowing  the  ideas  without  proper  credit. 

3  Theory  and  Practice  of  Banking,  II.,  29. 


106  HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

1 .  That  the  mint  price  of  gold  bullion,  or  the  legal  stand- 
ard of  the  coin  was,  ^3  ijs,  io}4d.  per  ounce. 

2.  That  the  market  price  of  gold  bullion  was  then  ^4  icw. 
per  ounce. 

3.  That  the  foreign  exchanges  had  fallen  to  an  enormous 
extent :  that  with  Hamburg,  nine  per  cent. ,  that  with  Paris 
14  per  cent. 

4.  That  the  increase  of  bank-notes  had  been  very  great 
during  the  last  few  years,  and  was  rapidly  augmenting. 

5.  That  specie  had  disappeared  from  circulation. 

The  report  made  by  the  committee  was  divided  into  four 
parts,  the  first  dealing  with  the  causes  of  the  high  price  of 
gold  ;  the  second,  with  the  state  of  the  foreign  exchanges 
and  the  reason  why  they  were  adverse  to  England  ;  the  third, 
with  the  conduct  of  the  Bank  of  England  in  the  regulation 
of  its  note  issues  ;  and  the  fourth,  the  increase  in  circulation 
of  the  Bank  of  England  and  of  the  country  banks  and  the 
increase  of  their  discounts. 

The  demonstration  was  easy  to  intelligent  and  unprejudiced 
observers  that  the  high  price  of  gold  was  the  measure  of  the 
depreciation  of  the  bank  paper.  The  contention  of  some  of 
those  who  declared  that  bank  paper  had  not  depreciated,  but 
that  gold  had  risen  in  value  because  of  its  scarcity,  grew  out 
of  a  muddy  confusion  of  ideas  regarding  the  relations  of 
prices  to  the  two  standards  of  gold  and  paper.  The  com- 
mittee showed  that  the  question  of  prices  had  no  relation  to 
the  difference  between  the  mint  price  and  the  market  price 
of  gold.  The  paragraph  in  which  they  made  this  clear  is 
as  follows : 


An  ounce  of  standard  gold  bullion  will  not  fetch  more  in  our 
market  than  ^3  I'js.  io%d.,  unless  ^"3  175.  io}£d.,  in  our  actual  cur- 
rency is  equivalent  to  less  than  an  ounce  of  gold.  An  increase  or 
diminution  in  the  demand  for  gold,  or  what  comes  to  the  same  thing, 
a  diminution  or  increase  in  the  general  supply  of  gold,  will,  no  doubt, 
have  a  material  effect  upon  the  money  prices  of  all  other  articles. 
An  increased  demand  for  gold,  and  a  consequent  scarcity  of  that 
article,  will  make  it  more  valuable  in  proportion  to  all  other  articles  ; 
the  same  quantity  of  gold  will  purchase  a  greater  quantity  of  any 


SECOND  CENTURY  OF  THE  BANK   OF  ENGLAND.    107 

other  article  than  it  did  before  ;  in  other  words,  the  real  price  of  gold, 
or  the  quantity  of  commodities  given  in  exchange  for  it,  will  rise,  and 
the  money  prices  of  all  commodities  will  fall ;  the  money  price  of 
gold  itself  will  remain  unaltered,  but  the  prices  of  all  other  commodi- 
ties will  fall.  That  this  is  not  the  present  state  of  things  is  abun- 
dantly manifest ;  the  prices  of  all  commodities  have  risen  and  gold 
appears  to  have  risen  in  its  price  only  in  common  with  them. 

Another  proof  that  it  was  not  the  scarcity  of  gold,  but  the 
depreciation  of  paper,  which  increased  the  market  price  ok 
gold  in  paper  was  the  fact  ' '  that  both  at  Hamburg  and 
Amsterdam,  where  the  measure  of  value  is  not  gold  as  in 
this  country,  but  silver,  an  unusual  demand  for  gold  would 
affect  its  money  price,  that  is,  its  price  in  silver  ;  and  that 
as  it  does  not  appear  that  there  has  been  any  considerable  rise 
in  the  price  of  gold,  as  valued  in  silver,  at  those  places  in 
the  last  year,  the  inference  is,  that  there  was  not  any  consid- 
erable increase  in  the  demand  for  gold."  The  committee 
also  called  attention  to  the  fact  that  on  previous  occasions 
1 '  the  excess  of  the  market  price  of  gold  above  its  mint  price 
was  found  to  be  owing  to  the  bad  state  of  the  currency  ; 
and  in  both  instances,  the  reformation  of  the  currency  effectu- 
ally lowered  the  market  price  of  gold  to  the  level  of  the  mint 
price."  By  parity  of  reasoning,  the  reformation  of  the  ex- 
isting paper  currency  would  lower  the  price  of  gold  to  the 
level  of  the  mint  price,  without  regard  to  the  quantity  of 
commodities  which  either  form  of  currency  might  purchase. 

The  high  rate  of  exchange  against  England,  as  expressed 
in  paper  currency,  was  explained  by  some  of  the  witnesses 
as  being  due  to  a  large  balance  of  payment  due  from  Eng- 
land to  other  countries,  either  on  account  of  imports  of 
merchandise  or  expenditures  abroad  on  account  of  military 
supplies  and  subsidies.  The  committee,  however,  pointed 
out  that  it  had  "  been  long  settled  and  understood  as  a  prin- 
ciple, that  the  difference  of  exchange  resulting  from  the 
state  of  trade  and  payments  between  two  countries  is  limited 
by  the  expense  of  conveying  and  insuring  the  precious 
metals  from  one  country  to  the  other  ;  at  least,  that  it 
cannot  for  any  considerable  length  of  time  exceed  that  limit. 


108  HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

The  real  difference  of  exchange,  resulting  from  the  state  of 
trade  and  payments,  never  can  fall  lower  than  the  amount 
of  such  expense  of  carriage,  including  the  insurance."  If 
proof  were  needed  of  this  simple  proposition,  it  was  fur- 
nished by  the  answers  given  to  the  searching  questions  of 
the  committee  by  Mr.  Greffulhe,  regarding  the  actual  rate 
of  exchange  in  coin.  ' '  From  these  answers  of  Mr.  Greffulhe, 
it  appears,"  said  the  committee,  "  that  when  the  computed 
exchange  with  Hamburg  was  29,  that  is,  from  16  to  17  per 
cent,  below  par,  the  real  difference  of  exchange,  resulting 
from  the  state  of  trade  and  balance  of  payments,  was  no 
more  than  five  and  a  half  per  cent,  against  this  country." 
The  committee  concluded,  therefore,  that  after  making  the 
necessary  allowances  for  the  balance  of  trade  and  payments, 
there  still  remained  a  fall  of  n  per  cent,  in  the  exchange  with 
Hamburg  "  to  be  explained  in  some  other  manner." 

Mr.  Harman,  one  of  the  directors  of  the  bank,  declared 
before  the  committee,  "I  must  very  materially  alter  my 
opinions  before  I  can  suppose  that  the  exchanges  will  be 
influenced  by  any  modification  of  our  paper  currency."  The 
committee  furnished  him  in  their  report  the  evidence  of 
the  depreciation  of  the  Scotch  currency,  when  the  optional 
clause  of  payment  was  inserted  after  the  Seven  Years'  War  ; 
the  depreciation  of  Irish  currency  six  years  before  ;  and  the 
depreciation  of  the  notes  of  the  Bank  of  England  itself  three 
years  after  its  foundation.  The  committee  then  declared  : 

Under  the  former  system,  when  the  bank  was  bound  to  answer  its 
notes  in  specie  upon  demand,  the  state  of  the  foreign  exchanges  and 
the  price  of  gold  did  most  materially  influence  its  conduct  in  the  issue 
of  those  notes,  though  it  was  not  the  practice  of  the  directors  syste- 
matically to  watch  either  the  one  or  the  other.  So  long  as  gold  was 
demandable  for  their  paper,  they  were  speedily  apprised  of  a  depres- 
sion of  the  exchange,  and  a  rise  in  the  price  of  gold,  by  a  run  upon 
them  for  that  article.  If  at  any  time  they  incautiousty  exceeded  the 
proper  limit  of  their  advances  and  issues,  the  paper  was  quickly 
brought  back  to  them,  by  those  who  were  tempted  to  profit  by  the 
market  price  of  gold  or  by  the  rate  of  exchange.  In  this  manner  the 
evil  soon  cured  itself. 

The  committee,  in   taking  up    the  question  of  excessive 


SECOND    CENTURY  OF  THE  BANK   OF  ENGLAND.    109 

issues,  made  the  discriminating  admission,  "that  the  mere 
numerical  return  of  the  amount  of  bank-notes  out  in  circula- 
tion cannot  be  considered  as  at  all  deciding  the  question 
whether  such  paper  is  or  is  not  excessive.  It  is  necessary 
to  have  recourse  to  other  tests. ' '  The  economy  of  money 
was  referred  to  which  had  taken  place  in  late  years,  by  "  the 
increased  use  of  bankers'  drafts  in  the  common  payments  of 
Ivondon  ;  the  contrivance  of  bringing  all  such  drafts  daily  to 
a  common  receptacle,  where  they  are  balanced  against  each 
other  ;  the  intermediate  agency  of  bill-brokers  ;  and  several 
other  changes  in  the  practice  of  L,ondon  bankers."  Not- 
withstanding this,  the  committee  found  an  approximate 
increase  between  1808  and  1809  of  ,£3,095,340  in  country 
bank-notes,  and  about  ;£  1,500,000  in  Bank  of  England  notes. 
The  suspension  of  cash  payments  imposed  no  other  expense 
upon  the  issuers  of  this  paper  than  the  printing  of  the  notes 
and  some  ,£100,000  in  stamp  taxes.  The  committee,  there- 
fore, asserted  their  conclusions,  ' '  That  there  is  at  present 
an  excess  in  the  paper  circulation  of  this  country,  of  which  the 
most  unequivocal  symptom  is  the  very  high  price  of  bullion, 
and  next  to  that,  the  low  state  of  the  Continental  exchanges  ; 
that  this  excess  is  to  be  ascribed  to  the  want  of  a  sufficient 
check  and  control  in  the  issues  of  paper  from  the  Bank  of 
England  ;  and  originally  to  the  suspension  of  cash  payments, 
which  removed  the  natural  and  true  control." 

The  Bullion  Report  was  presented  by  Mr.  Horner  to  the 
House  on  June  9,  1810,  but  was  not  taken  up  for  considera- 
tion until  May  6,  1811.  The  debate  was  opened  by  Mr. 
Horner,  who  spoke  for  three  hours  and  closed  by  moving  a 
series  of  sixteen  resolutions.  These  resolutions  declared  that 
when  Parliament  passed  the  restriction  act,  it  had  no  inten- 
tion that  the  value  of  the  bank-notes  should  be  altered,  but 
that  they  had  for  a  considerable  time  been  below  their  legal 
value,  and  that  the  extraordinary  depression  of  the  foreign 
exchanges  was  in  great  part  due  to  the  depreciation  of  the 
currency  of  England  relative  to  that  of  other  countries.  The 
final  resolutions  declared  that  the  only  method  of  preserving 
the  paper  currency  at  its  proper  value  was  to  make  it  paya- 


HO         HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

ble  on  demand  in  the  legal  coin  of  the  realm,  and  that  cash 
payments  ought  to  be  resumed  at  the  end  of  two  years.  The 
report  was  ably  supported  by  Mr.  Henry  Thornton,  but 
was  assailed  by  Mr.  Rose,  Mr.  Vansittart,  and  others.  Mr. 
Vansittart  maintained  that  ' '  a  standard  in  the  sense  used  by 
these  gentlemen,  namely,  a  fixed  and  invariable  weight  of 
the  precious  metals  as  a  measure  of  value,  never  existed  in 
this  country. ' '  His  idea  was  that  the  pound  sterling  was  a 
sort  of  intangible  thing,  and  that  the  paper  pound  was  not 
to  be  considered  as  depreciated  so  long  as  it  formed  the  cur- 
rent medium  of  exchange,  and  was  accepted  in  the  discharge 
of  obligations.  The  effort  was  made  by  the  defenders  of 
paper  money  to  deny  any  difference  between  gold  prices  and 
paper  prices,  but  it  was  disclosed  in  the  course  of  the  debate 
that  the  government  themselves  were  making  a  distinction 
by  paying  guineas  to  the  soldiers  in  Guernsey  at  the  value 
of  23  shillings,  although  their  legal  value  was  only  21 
shillings. 

The  country  was  not  ready  to  return  to  a  specie  basis,  and 
Mr.  Horner's  first  resolution  was  defeated  by  a  vote  of  75 
in  the  affirmative  to  151  in  the  negative,  and  his  final  reso- 
lution by  a  vote  of  45  to  180.  Mr.  Vansittart  followed  up 
his  victory  by  a  series  of  resolutions,  to  the  effect  ' '  That  the 
promissory  notes  of  the  Bank  of  England  have  hitherto 
been,  and  are  at  this  time  held  to  be,  equivalent  to  the  legal 
coin  of  the  realm,"  and  that  the  price  of  bullion  and  the 
state  of  the  foreign  exchanges  were  in  no  way  due  to  exces- 
sive issues  of  bank  paper.  Notwithstanding  the  protests  of 
the  better  informed  members  of  the  House,  an  amendment 
by  Mr.  Canning  was  rejected,  42  to  82,  and  Mr.  Vansittart' s 
astounding  resolutions  were  carried. 

The  opponents  of  the  Bullion  Report  laid  stress  upon  the 
fact  that  gold  was  not  sold  openly  at  a  premium.  The  rea- 
son was  the  belief  that  it  was  a  penal  offence  to  part  with  a 
bank-note  for  less  than  its  face  value  in  bullion,  and  at  the 
very  moment  of  the  debate  on  Mr.  Horner's  report  three 
men  were  lying  in  prison  for  selling  guineas  for  more  than 
twenty-one  shillings  under  an  old  statute  of  Edward  VI. 


SECOND   CENTURY  OF  THE  BANK  Of  ENGLAND.    Ill 

The  issue  soon  after  came  before  the  Court  of  Common  Pleas 
and  they  unanimously  quashed  a  conviction  under  the  law 
and  declared  that  it  was  no  crime  to  sell  guineas  at  a  pre- 
mium. Lord  King  in  March,  1811,  issued  a  circular  to  sev- 
eral of  his  tenants,  reminding  them  that  their  contract  was 
to  pay  a  certain  quantity  of  the  legal  coin  of  the  country,  and 
that,  as  the  paper  currency  was  considerably  depreciated,  he 
should  in  future  require  his  rents  to  be  paid  in  the  legal  coin 
of  the  realm,  in  Portugese  coin  of  equal  weight,  or  by  a  suffi- 
cient amount  of  bank-notes  to  purchase  the  necessary  weight 
of  standard  gold.  This  attempt  to  establish  a  gold  price 
distinct  from  the  paper  price  of  commodities  caused  a  tem- 
pest of  rage  among  the  advocates  of  a  paper  currency  and 
led  to  the  charge  againt  Lord  King,  so  much  bandied  about 
in  France,  of  incivism.  A  bill  was  promptly  introduced  into 
Parliament  by  Lord  Stanhope,  making  it  a  misdemeanor  to 
make  any  difference  in  payments  between  guineas  and  bank- 
notes. The  measure  passed  the  House  of  Lords  by  a  vote 
of  43  to  16,  and  the  House  of  Commons  by  a  vote  of  95  to  20. 
The  disasters  to  the  country  banks  during  1815  and  1816 
greatly  reduced  the  volume  of  paper  afloat  and  made  way 
for  additional  issues  by  the  Bank  of  England.  The  reduc- 
tion in  country  bank  paper  in  circulation  is  estimated  by 
Professor  MacLeod  l  at  three  times  the  amount  of  the  issue 
of  the  Bank  of  England,  and  the  effect  was  immediately  felt 
in  the  rise  in  value  of  Bank  of  England  notes.  The  market 
price  of  gold  in  paper  fell  from  ^5  6s.,  in  May,  1815,  to  ^3 
iSs.  6d.,  or  within  three  per  cent,  of  par,  in  October,  1816. 
Foreign  exchange  rose  in  a  corresponding  degree,  and  these 
rates  prevailed  until  the  mid-summer  of  1817.  The  bank 
had  been  preparing  during  the  peace  in  1815  to  resume 
specie  payments  and  were  able  after  the  final  overthrow  of 
Napoleon  to  announce,  in  November,  1816,  that  they  would 
pay  all  notes  dated  previous  to  January  i,  1812,  and  that  in 
the  following  April  they  would  pay  all  notes  dated  before 
January  i,  1816.  Resumption  was  thus  almost  accomplished 


Theo>">  and  Practice  of  Banking,  II.,  62. 


112          HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

and  the  people  were  found  to  be  so  accustomed  to  a  paper 
currency  that  little  demand  was  made  for  gold  and  many 
persons  who  had  hoarded  gold  presented  it  for  exchange  in 
bank-notes. 

Cash  payments  were  not  yet  established  by  law,  however, 
and  the  restriction  had  been  continued,  after  Napoleon's 
return  from  Elba,  until  July,  1818.  The  return  of  peace 
brought  a  great  many  foreign  borrowers  to  Kngland. 
Prussia,  Austria,  and  other  states  were  endeavoring  to  ob- 
tain gold  to  reform  their  currencies.  The  result  was  a 
heavy  drain  upon  the  gold  reserve,  which  had  reached 
^11,914,000  in  October,  1817,  and  the  reappearance  of  a 
premium  upon  coin  and  bullion.1  Advances  to  the  govern- 
ment were  increased  from  ^20,000,000  to  ^28,000,000  and 
the  bank  made  no  effort  to  restrict  their  issues,  in  the  face 
of  the  foreign  drain  and  a  new  increase  in  the  circulation  of 
the  country  banks.  It  was  perfectly  evident  that  specie 
payments  could  not  long  be  maintained  with  the  paper  price 
of  gold  at  ^4  3^.,  or  about  seven  per  cent,  premium,  and 
committees  were  appointed  on  February  3,  1819,  by  both 
houses  of  Parliament  to  inquire  into  the  state  of  the  bank. 
They  reported  in  favor  of  a  further  suspension  of  specie 
payments  and  a  bill  for  the  purpose  became  law  on  April 


1  The  question  was  much  discussed  by  the  orthodox  believers  of 
the  classical  school  of  political  economy,  why  prices  of  commodities 
did  not  fall  with  the  export  of  gold  and  invite  foreign  purchasers  of 
English  merchandise.  As  Prof.  Sumner  puts  it  {History  of  American 
Currency,  264),  "  If  all  nations  used  specie,  or  even  paper  and  specie, 
in  only  due  proportion  it  would  be  as  impossible  for  one  nation  to  be 
drained  of  specie  as  for  New  York  harbor  to  be  drained  of  water  by 
the  tide."  But  all  nations  do  not  use  specie  only,  but  credit,  and 
modern  experience  has  demonstrated  that  prices  do  not  move  up  and 
down  with  gold  exports  and  imports,  but  under  the  operation  of 
much  wider  causes  in  the  credit  market.  The  Bank  of  England  did 
not  employ  at  this  time  the  method  of  protecting  its  cash  by  raising 
the  rate  of  discount,  and  the  orthodox  theory  of  price  movements  was 
of  no  practical  avail  against  the  operation  of  special  causes  which 
drew  off  gold.  See  an  outline  of  the  discussion  in  Money ',  by  Francis 
A.  Walker,  356-58. 


SECOND  CENTURY  OF  THE  BANK  OF  ENGLAND.    113 

5th.  The  bill  forbade  the  bank  to  make  payments  in  gold 
either  for  fractional  sums  or  for  any  of  their  notes  during  the 
session  of  Parliament.  The  committees  then  addressed 
themselves  to  a  full  hearing  regarding  the  bank  manage- 
ment and  the  best  means  of  resuming  specie  payments  upon 
a  secure  basis. 

The  testimony  taken  by  the  committees  indicated  a 
marked  advance  in  sound  opinion  among  bankers  and  busi- 
ness men  since  the  adoption  of  the  comic  resolutions  of  Mr. 
Vansittart.  Nearly  all  the  witnesses  admitted  the  influence 
of  the  irredeemable  circulation  upon  the  foreign  exchanges 
and  the  necessity  of  curtailing  the  circulation  when  the  ex- 
changes became  unfavorable  and  the  automatic  regulation 
of  redemption  in  coin  on  demand  was  lacking.  The  majority 
of  the  bank  directors  were  not  convinced  of  the  wisdom  of 
these  views  until  several  years  later,  but  Sir  Robert  Peel 
changed  his  opinion  completely  and  found  a  powerful  sup- 
porter in  L,ord  Grenville,  who  was  a  member  of  the  Cabinet 
which  originally  proposed  the  restriction  act.  Lord  Gren- 
ville went  so  far  as  to  declare  that  he  considered  the  restric- 
tion one  of  the  greatest  calamities  under  which  the  country 
labored  and  to  deplore  the  part  which  he  had  himself  taken 
when  it  was  proposed.  While  the  bank  was  enabled  by  the 
act  to  lend  money  with  one  hand,  he  declared,  it  was  with 
the  other  shaking  the  foundation  of  contracts,  affecting 
prices,  and  involving  the  country  in  distress  and  individuals 
in  ruin  ten  times  greater  than  any  benefits  they  could  derive 
from  liberal  issues. 

Both  houses  concurred  in  the  passage  of  a  bill  for  the 
gradual  resumption  of  specie  payments  by  the  reduction  of 
the  mint  price  of  gold.  It  was  provided  that  after  February 
i,  1820,  the  bank  should  be  required  to  deliver  gold  of  stand- 
ard fineness  in  quantities  of  not  less  than  sixty  ounces  at  ^4 
is.  per  ounce  ;  that  after  October  i,  1820,  the  rate  should  be 
reduced  to  £$  19^.  6d.,  and  after  May  i,  1821,  to  the  mint 
price  of  ^3  17^.  iol/zd.  per  ounce.  The  provision  for  pay- 
ment in  bullion  was  adopted  so  as  to  prevent  a  run  upon  the 
bank  for  coin  by  small  note-holders,  while  it  established 


114          PI  I  STORY  OF  MODERN  BANKS  OF  ISSUE. 

substantial  coin  redemption  when  the  bullion  came  to  be 
delivered  at  the  mint  price.1  This  liability  to  pay  in  bullion 
was  to  continue  until  May  i,  1823,  after  which  full  redemp- 
tion in  coin  on  demand  was  to  be  required.  The  statutes 
restricting  the  trade  in  gold  coin  and  bullion  were  repealed 
and  Mr.  Pitt's  practice  of  free  borrowing  from  the  bank  was 
cut  off  by  an  act  forbidding  advances  of  any  description 
without  the  express  authority  of  Parliament.  It  is  probable 
that  the  bank  would  have  been  able  to  resume  cash  payments 
without  authority  of  legislation,  within  the  time  which  the 
act  required,  but  its  passage  by  Parliament  did  much  to 
educate  and  crystallize  public  opinion  and  to  protect  the 
bank  during  the  attacks  upon  the  resumption  act  which  were 
made  within  the  next  few  years. 

The  accumulation  of  gold  in  the  Bank  of  England  was  so 
rapid  that  it  became  possible  to  pass  an  act  in  1821  permit- 
ting full  resumption  on  May  i,  1821.  The  government 
repaid  ^10,000,000  of  its  obligations  to  the  bank  and  specie 
payments  were  resumed  in  coin  at  the  date  fixed  by  law. 
The  bad  harvests  and  commercial  collapse  led  to  several 
attacks  upon  the  resumption  act  in  Parliament  in  1822  and 
1823,  but  they  were  rejected  by  large  majorities.  It  was 
pointed  out  in  the  course  of  the  debate  that  the  low  price 
of  wheat,  which  was  a  great  cause  of  discontent  among  the 
agricultural  class,  could  not  well  be  due  to  the  alleged  con- 
traction of  the  currency,  for  a  greater  decline  had  taken 
place  in  France,  which  had  been  steadily  upon  a  metallic 
basis,  and  a  like  decline  in  other  Continental  countries  where 
depreciated  paper  was  still  the  medium  of  circulation.  The 
price  of  wheat  at  Vienna,  in  spite  of  the  large  volume  of  the 
Austrian  paper  currency,  had  dropped  from  1 14^.  in  March 
1817,  to  19^.  6d.,  in  September,  1819.  It  was  shown  also 
that  the  amount  of  currency  in  England  had  increased  rather 
than  diminished,  for  the  paper  issues  had  not  been  materially 
reduced  and  a  large  mass  of  coin  had  been  infused  into  the 
circulation.  The  only  concession  obtained  by  the  opponents 


137- 


SECOND   CENTURY  OF  THE  BANK  OF  ENGLAND.    11$ 

of  resumption  was  the  statute  of  1822  (Chapter  70),  author- 
izing country  bankers  to  continue  the  issue  of  notes  for  £i 
until  the  expiration  of  the  charter  of  the  Bank  of  England 
in  1833.  The  permission  to  issue  £i  notes,  which  had  been 
given  to  the  Bank  of  England  in  1797  and  continued  during 
the  entire  period  of  restriction,  was  withdrawn  by  the 
resumption  acts. 

The  effect  of  the  monopoly  of  the  Bank  of  England, 
which  deprived  any  corporation  or  large  firm  of  the  power  to 
issue  notes,  but  left  the  power  to  firms  of  six  persons  or  less, 
was  the  subject  of  severe  criticism  every  time  that  the  small 
country  banks  were  swept  away  in  a  period  of  industrial 
depression.  The  success  of  the  Scotch  banking  system  was 
attracting  attention  and  English  financiers  were  desirous  of 
adopting  it  in  England.  It  was  supposed,  however,  down 
to  1823,  that  no  joint  stock  bank  could  be  lawfully  established 
in  England  because  of  the  exclusive  privileges  conferred 
upon  the  Bank  of  England  by  the  Act  of  1742.  It  was 
found,  upon  careful  inspection  of  the  act,  and  having  in 
view  the  rule  of  law  that  a  penal  statute  must  be  construed 
strictly,  that  the  restrictions  were  limited  in  their  application 
to  banks  of  issue.  The  failure  to  make  any  distinction  up 
to  this  time  between  the  power  to  establish  joint  stock  banks 
for  the  purpose  of  issuing  notes  and  the  power  to  establish 
them  for  other  purposes  was  due  to  the  early  impression  that 
banking  could  not  be  carried  on  without  the  issue  of  notes. 
The  London  private  bankers  had  for  thirty  years  suspended 
the  use  of  circulating  promissory  notes,  but  the  tradition 
lingered  that  joint  stock  banks  could  not  be  established  with- 
out infringing  the  legal  monopoly  of  the  Bank  of  England. 
Mr.  Joplin  in  a  pamphlet  issued  in  1823  announced  his  dis- 
covery that  the  charter  of  the  bank  "  does  not  prevent  pub- 
lic banks  for  the  deposit  of  capital  from  being  established."  1 

There  was  natural  hesitation,  even  after  this  discovery,  to 
embark  in  joint  stock  banks  of  deposit  without  specific 
authority  of  law,  but  the  discovery  probably  had  something 


MacLeod,  Theory  and  Practice  of  Banking,  II.,  381. 


Il6         HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

to  do  with  wringing  concessions  from  the  Bank  of  England 
and  improving  the  existing  system.  The  government  pro- 
posed to  the  bank  in  1823  that  it  consent  to  the  creation  of 
joint  stock  banks  of  issue  at  a  distance  of  sixty-five  miles 
from  London,  upon  condition  of  the  extension  of  the  bank 
charter  for  ten  years.  This  proposition  was  rejected,  but 
the  subject  was  revived  after  the  dreadful  panic  of  1825. 
The  time  for  the  renewal  of  the  charter  was  drawing  nearer 
and  the  bank  consented  to  the  Act  of  1826,  establishing 
joint  stock  banks  of  issue  beyond  the  radius  of  sixty-five 
miles  from  London  and  requiring  the  bank  to  establish 
branches.  These  joint  stock  banks  were  authorized  to  issue 
notes,  but  they  were  not  to  issue  them  within  the  prescribed 
distance  nor  to  draw  upon  their  London  agents  any  bill  of 
exchange  payable  on  demand  or  for  any  less  sum  than  ^50. 
A  sworn  list  of  the  shareholders  and  places  for  carrying  on 
business  was  required  of  the  new  banking  companies,  but 
few  restrictions  were  imposed  as  to  their  management,  capital, 
or  cash  reserve. 

Few  joint  stock  banks  were  formed  for  the  first  few  years 
after  the  Act  of  1826,  as  the  leading  country  bankers  already 
had  private  banks  and  had  no  wish  to  set  up  powerful  rivals. 
The  Bank  of  England  managers  clung  to  the  monopoly  of 
banking  in  London,  even  after  they  had  conceded  freedom 
beyond  the  sixty-five  mile  radius,  and  begged  Lord  Althorp, 
when  the  charter  was  renewed  in  1833,  to  insert  a  clause 
clearly  preventing  the  formation  of  joint  stock  banks  in  the 
City.  Lord  Althorp,  having  obtained  the  opinion  of  the 
law  officers  of  the  Crown,  in  favor  of  the  right  to  set  up  de- 
posit banks,  refused  to  impose  new  restrictions  and  tartly 
reminded  the  directors  of  the  bank  that  the  bargain  was  that 
their  privileges  should  remain  as  they  were, — not  that  they 
should  be  extended.1  A  clause  was  inserted  in  the  Act  of 
1833,  specifically  declaring  that  any  body  politic  or  corporate 
or  partnership  might  carry  on  the  business  of  banking  in 
London  or  within  sixty-five  miles  thereof,  provided  they  did 


1  MacL/eod,  Theory  and  Practice  of  Banking •,  II.,  384. 


SECOND   CENTURY  OF  THE  BANK  OF  ENGLAND. 

not  issue  notes  payable  on  demand.  It  was  not  until  after 
this  act  that  it  was  seriously  attempted  to  set  up  a  joint 
stock  bank  in  London.  The  history  of  these  banks  is  not  a 
part  of  the  history  of  banks  of  issue,  but  it  is  an  interesting 
fact  that  the  first  was  the  London  and  Westminster  Bank, 
which  was  originally  formed  as  a  private  partnership  and 
whose  manager  was  Mr.  James  W.  Gilbart,  the  author  of 
one  of  the  most  complete  and  intelligent  works  on  English 
banking.  Joint  stock  banks  of  issue  were  formed  in  con- 
siderable numbers  in  the  prosperous  years  preceding  the 
panic  of  1836,  and  more  than  forty  were  established  in  the 
spring  of  the  latter  5^ear.  The  number  issuing  notes  when 
the  restrictive  Act  of  1844  took  effect  was  72,  of  which  only 
14  still  retain  the  privilege. 

The  Bank  of  England  opened  its  first  branches  at  Glou- 
cester, Manchester,  and  Swansea.  The  branches  were  able  to 
compete  on  favorable  terms  with  the  country  banks  and  to 
discount  bills  at  four  per  cent.,  where  the  old  banks  charged 
five  per  cent,  and  sometimes  an  additional  commission. 
The  principal  advantage  which  the  country  bankers  re- 
tained was  the  payment  of  interest  on  deposits,  but  they 
felt  keenly  the  competition  of  the  branch  banks  and  held 
a  meeting  as  early  as  December  7,  1826,  to  consider  it. 
They  adopted  resolutions  that  the  establishment  of  branch 
banks  ' '  have  the  evident  tendency  to  subvert  the  general 
banking  system  that  has  long  existed  throughout  the  coun- 
try, and  which  has  grown  up  with,  and  been  adapted  to,  the 
wants  and  conveniences  of  the  public."  A  deputation  was 
sent  to  the  Chancellor  of  the  Exchequer,  who  promised  to 
give  serious  consideration  to  their  views.  Further  cause  of 
complaint  was  found  in  the  stamp  duties,  which  were  levied 
upon  the  country  bank-notes  according  to  value,  while  a 
fixed  sum  was  accepted  from  the  Bank  of  England  for  their 
entire  issues.  The  result,  according  to  the  country  bankers, 
was  to  subject  them  to  a  tax  of  ^650  on  ;£  10,000  where  the 
bank  paid  only  ^35.  This  protest  resulted  in  an  act  ex- 
tending the  privileges  of  the  Bank  of  England  to  the  coun- 
try banks,  but  the  general  protests  against  the  branches  were 


Il8          HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

answered  by  the  assurance  that  ' '  the  interest  of  the  country 
bankers  should  not  be  neglected  in  any  negotiation  between 
the  government  and  the  Bank  of  England  for  the  renewal  of 
the  bank  charter. ' '  * 

The  extension  of  country  banking,  without  any  legal 
regulation,  was  popularly  regarded  as  one  of  the  causes  of 
the  panic  of  1825  as  well  as  of  some  of  the  earlier  panics. 
The  issue  of  small  notes  by  the  country  banks  was  treated 
by  eminent  statesmen  as  an  especially  dangerous  feature  of 
country  banking  and  as  having  a  tendency  to  expel  coin 
from  the  circulation.  Many  of  these  notes  were  retired  by 
the  insolvency  of  the  issuers  in  the  panic  of  1825  and  the 
ministry  seized  the  opportunity  to  propose  their  prohibition 
for  the  future.  They  took  steps,  without  waiting  for  Parlia- 
ment to  act,  to  prohibit  the  issue  of  the  required  stamps  for 
;£i  and  £2  notes  and  the  Chancellor  of  the  Exchequer  made 
an  early  motion  in  Parliament  that  no  notes  be  issued  in  the 
future  under  £5.  The  proposition  became  law  and  after  a 
sharp  contest  was  extended  in  1828  to  Scotch  notes  circula- 
ting in  England.9 

The  approach  of  the  date  fixed  for  the  expiration  of  the 
bank  charter, — at  the  end  of  one  year's  notice  after  August 
i,  1833, — le(*  to  the  appointment  of  a  committee  of  the  House 
of  Commons  May  22,  1832,  to  consider  the  privileges  to  be 
granted  in  the  extended  charter.  The  witnesses  examined 
discussed  the  propriety  of  establishing  joint  stock  banks  in 
London  (which  most  of  them  opposed),  the  publications  of 
the  accounts  of  the  bank,  the  regulation  of  the  circulation, 
and  the  rate  of  discount.  The  subject  of  making  the  bank- 
notes legal  tender  except  at  the  bank  was  also  considered 
and  the  change  was  urged  upon  the  ground  that  the  notes 
could  then  be  used  by  the  country  banks  in  the  redemption 
of  their  own  notes  in  times  of  panic  and  the  demand  for 
gold  diminished.  Lord  Althorp  moved  the  resolutions  for 

1  Gilbart,  I.,  70-73. 

2  The  history  of  Scotch  and  Irish  banking  will  show  that  the  effort 
made  at  this  time,  to  deprive  those  countries  of  the  use  of  small 
notes,  was  defeated. 


SECOND   CENTURY  OF  THE  BANK  OF  ENGLAND.    1 19 

the  renewal  of  the  charter  on  May  31,  1833,  and  it  was  de- 
cided by  a  vote  of  316  to  83  to  proceed  with  their  considera- 
tion. The  proposition  to  make  the  notes  legal  tender  except 
at  the  bank  prevailed  by  a  vote  of  214  to  156. 

The  new  charter  continued  the  exclusive  privilege  of  note 
issue  within  sixty-five  miles  of  London,  but  authorized 
country  banks  to  have  agencies  in  London  for  the  purpose 
of  paying  such  of  their  notes  as  might  be  presented.  The 
bank  was  authorized  to  reduce  its  capital  by  one-fourth  of 
the  amount  of  the  debt  of  the  public  to  the  bank  and  in 
consideration  of  its  privileges  surrendered  ;£  120,000  of  the 
amount  allowed  annually  by  the  government  for  the  man- 
agement of  the  debt.1  The  charter  of  the  bank  was  ex- 
tended to  one  years'  notice,  to  be  given  within  six  months 
after  the  expiration  of  ten  years  from  August  i,  1834,  and 
until  repayment  of  all  debts  due  by  Parliament  to  the  bank. 
The  renewal  of  the  charter  in  1844  extended  the  life  of  the 
bank  until  twelve  months'  notice  after  August  i,  1855,  and 
the  repayment  of  the  public  debt.  No  such  notice  was 
given  and  the  bank  continued  to  operate  under  this  author- 
ity until  1870.  A  revision  was  made  at  that  time  of  the 
statutes  relating  to  the  public  debt,  and  it  was  enacted  that 
the  Bank  of  England  shall  continue  a  corporation  until  all 
the  public  funds  are  duly  redeemed  by  Parliament.2 

The  period  following  the  crisis  of  1839  developed  a  pecul- 
iar doctrine  of  finance  in  England,  which  obtained  a  strong 
footing  among  public  men  with  only  a  rudimentary  know- 
ledge of  political  economy  and  has  spread  to  some  extent 
on  the  Continent  of  Europe  and  in  the  United  States.  This 

1  The  government  repaid  one-fourth  of  the  permanent  debt,  amount- 
ing to  ^3,671,000,   and  reducing  the  principal  to  ^11,015,100;  but 
the  bank  never  availed  itself  of  the  permission  to  deduct  the  amount 
crom  its  capital,  which  remains  at  ^14,553,0  AD,  where  it  was  fixed  in 
1816.     The  interest  on  the  debt  to  the  bank  was  reduced  in  1892  from 
three  to  two  and  three-fourths  per  cent.,  and  changes  were  made  in  the 
allowances  for  managing  the  debt  which  made  the  total  saving  to  the 
government  ^45,700.— London  Bankers'  Magazine,  July,  1892,  LIV., 
50. 

2  Clause  72,  Act  33  and  34  Victoria,  c.  71. 


I2O          HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

doctrine  embodies  the  ideas  that  bank-notes  are  a  form  of 
currency  entirely  distinct  from  other  commercial  paper  and 
forms  of  credit  ;  that  an  expansion  of  bank-note  issues,  even 
when  redeemable  in  coin  on  demand,  is  a  potent  cause  of 
commercial  crises  ;  and  that  the  way  to  prevent  crises  is  to 
place  fixed  limits  upon  bank-note  issues.  Few  advocates  of 
this  theory  have  undertaken  to  place  definite  limits  upon  the 
volume  of  bills  of  exchange  or  of  other  forms  of  commercial 
paper  issued  by  solvent  borrowers,  but  they  have  maintained 
that  bank-notes  were  money  for  all  practical  purposes  of 
daily  use  ;  that  an  undue  expansion  in  the  volume  of  money 
has  stimulated  speculation  and  expelled  gold  under  the  opera- 
tion of  Gresham's  law;  and  that  the  curtailment  of  note 
issues  would  maintain  sobriety  in  the  mercantile  world  and 
restore  the  equilibrium  of  the  foreign  exchanges. 

The  advocates  of  this  view,  of  whom  the  most  conspicu- 
ous were  Sir  Robert  Peel,  L,ord  Overstone,  and  Colonel  Tor- 
rens,  named  their  new  discovery  "  The  currency  principle," 
and  immediately  set  out  to  rescue  the  commercial  world  of 
Great  Britain  from  future  disturbance  by  enforcing  their 
policy  in  a  modified  form  upon  the  Bank  of  England.  Sir 
Robert  Peel  declared,  in  advocating  the  resumption  act  of 
1819,  that  it  was  impossible  to  prescribe  any  specific  limita- 
tion of  issue  for  the  bank  and  that  the  quantity  of  circula- 
tion which  was  demanded  in  a  time  of  confidence  varied 
materially  from  the  amount  required  in  a  period  of  despon- 
dency. He  became  a  complete  convert  to  the  currency 
principle  in  1844  and  introduced  the  bill  which  became  the 
basis  of  the  present  charter  of  the  Bank  of  England.  The 
theory  of  the  currency  principle  was  so  generally  accepted 
as  a  means  of  putting  an  end  to  panics  that  amendment  was 
refused  by  the  House  of  Commons  by  a  vote  of  185  to  30, 
and  the  bill  passed  the  House  of  Lords  without  a  division, 
and  received  the  royal  assent  on  July  19,  1844.  The  bill 
absolutely  cut  off  the  creation  of  banks  of  issue,  except  by 
the  union  of  existing  banks,  and  made  the  future  elasticity  of 
English  currency  dependent  upon  deposits  of  coin  or  bullion 
with  the  Bank  of  England. 


SECOND   CENTURY  OF  THE  BANK  OF  ENGLAND.    121 

The  new  charter  provided  for  the  separation  of  the  issue 
department  from  the  banking  department  of  the  Bank  of 
England  and  placed  the  issue  department  under  the  charge 
of  a  committee  of  the  directors  appointed  by  the  entire  body. 
The  Governor  was  directed  to  transfer  to  the  issue  depart- 
ment on  August  31,  1844,  securities  to  the  value  of  ,£14,- 
000,000,  of  which  the  debt  due  by  the  government  to  the 
bank  was  to  be  a  part.  The  bank  was  also  to  deliver  to  the 
issue  department  such  of  the  gold  coin  and  bullion  as  was 
not  required  for  the  banking  department  and  was  to  receive 
back  a  quantity  of  notes  which  should  make  the  circulation 
of  the  bank  exactly  equal  to  the  coin  and  bullion  on  deposit, 
plus  the  sum  of  ^"14,000,000  represented  by  securities.1 
Thenceforth  the  issue  department  was  to  pay  coin  and 
bullion  for  notes  and  issue  notes  for  coin  and  bullion,  and 
no  department  of  the  bank  was  authorized  or  permitted  to 
issue  notes  in  excess  of  the  limits  thus  established.  The 
price  of  gold  at  the  bank  was  fixed  for  the  future  at  ^3  175. 
gd.  per  ounce.  Weekly  accounts  of  the  circulation  were  to 
be  transmitted  to  the  government  and  published  in  the  Lon- 
don Gazette.  The  bank  was  required  to  pay  ;£  180,000  annu- 
ally for  its  privileges  instead  of  the  rate  of  ;£  120,000  fixed  in 
1833.  This  payment  was  modified  in  1861  and  now  amounts 
to  about  ,£200,000. 

The  purpose  of  fixing  the  amount  of  notes  covered  by  se- 
curities at  ^14,000,000  was  to  economize  that  amount  of 
gold  without  impairing  the  convertibility  of  the  note.  The 
amount  was  arrived  at,  not  with  any  special  regard  to  the 
capital  of  the  bank  or  the  government  debt  already  held,  but 
with  regard  to  the  smallest  amount  of  Bank  of  England 


1  Whether  the  notes  constitute  a  prior  lien  on  the  securities  and 
bullion  in  the  issue  department  is  a  point  which  is  not  clearly  set 
forth  and  has  never  been  judicially  decided.  The  act  directs  that 
"  there  shall  be  transferred,  appropriated,  and  set  apart  by  the  said 
governor  and  company  to  the  issue  department  securities  to  the  value 
of  ^14,000,000"  ;  but  "it  shall  be  lawful  for  them  to  diminish  the 
amount  of  such  securities,"  which  seems  to  preclude  the  idea  that 
they  are  not  part  of  the  general  assets  of  the  bank. — Price,  65. 


122          HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

notes  which  could  be  counted  upon  to  remain  always  in  cir- 
culation. It  was  found  that  the  net  circulation  in  Decem- 
ber, 1839,  was  ^14,732,000,  and  it  was  argued  that  at  least 
,£2,000,000  more  must  be  kept  in  the  banking  reserve  of  the 
bank.  It  was  considered  safe,  therefore,  to  fix  the  uncov- 
ered circulation  at  ^14,000,000  and  it  was  left  to  the  play  of 
the  foreign  exchanges  to  control  the  fluctuations  above  that 
amount.1  Gold  imported  under  the  attraction  of  low  prices 
and  high  interest  rates  would  be  brought  to  the  bank  and 
exchanged  for  notes,  under  the  theory  of  the  framers  of  the 
act,  and  gold  withdrawn  from  the  country  by  the  attraction 
of  low  prices  and  high  interest  rates  elsewhere  would  be 
taken  from  the  bank  by  the  presentation  of  notes,  which 
would  thus  be  withdrawn  from  circulation. 

The  principle  of  issuing  notes  covered  by  other  securities 
than  coin,  within  the  safe  maximum  limit  of  the  amount 
which  can  be  kept  permanently  in  circulation,  is  a  simple 
and  intelligible  banking  principle,  and  indeed  the  principle 
upon  which  modern  banking  is  founded.  The  declared  pur- 
pose of  the  act — "  to  cause  our  mixed  circulation  of  coin 
and  bank-notes  to  expand  and  contract,  as  it  would  have 
expanded  and  contracted  under  similar  circumstances  had  it 
consisted  exclusively  of  coin," — also  seemed  simple  and  in- 
telligible to  those  who  ignored  the  existence  of  credit  and 
the  domestic  causes  which  made  a  larger  circulation  desira- 
ble at  some  periods  than  at  others.  The  Act  of  1844  pro- 
posed substantially  to  destroy  the  bank-note  as  an  instrument 
of  credit  and  make  it  a  mere  certificate  of  coin,  leaving  to 
other  forms  of  commercial  paper  the  functions  which  the 
bank-note  had  in  part  performed.  It  is  obvious,  however, 
that  the  framers  of  the  act,  in  fixing  a  maximum  limit  of 
authorized  circulation,  meant  to  deal  only  with  the  condi- 
tions then  existing  and  that,  if  their  theory  had  proved  op- 
erative, they  could  not  have  objected  to  a  much  higher  limit 
to  meet  the  expanded  volume  of  modern  trade. 

Existing  private  and  joint  stock  banks  of  issue  were  per- 
mitted, with  the  usual  respect  of  English  law  for  vested 

1  Mr.  Torrens,  quoted  by  Hankey,  5-8. 


SECOND   CENTURY  OF  THE  BANK  OF  ENGLAND.    12$ 

rights,  to  continue  their  outstanding  circulation.  It  was  the 
purpose  and  expectation  that  these  banks  would  gradually 
be  led  to  retire  their  circulation  and  remit  the  power  to  the 
central  bank  of  issue.  Provision  for  this  contingency  was 
made  by  the  authority  given  the  bank  to  increase  the 
amount  of  securities  in  the  issue  department  to  an  amount 
not  exceeding  two-thirds  of  the  country  bank-notes  with- 
drawn and  to  issue  circulation  against  the  new  securities.1 
The  new  issues  did  not  fall  to  the  bank  automatically,  but 
required  an  order  from  the  Crown  in  Council.  The  amount 
of  circulation  allowed  the  country  banks  was  determined  by 
the  average  circulation  during  the  twelve  weeks  preceding 
April  27,  1844,  and  the  amount  was  found  to  be  .£5,153,417 
for  the  207  private  banks  and  ,£3,478,230  for  the  72  joint 
stock  banks.  It  was  not  until  December  13,  1855,  that  any 
increase  was  made  in  the  secured  circulation  of  the  Bank  of 
England.  Forty-seven  banks  with  aggregate  issues  of 
,£712,623  had  ceased  to  issue  their  notes  since  the  Act  of 
1844  and  an  order  was  made  authorizing  the  increase  of  the 
Bank  of  England  issue  by  £47 5,000.  The  next  increase  was 
,£175, ooo  in  1861,  and  the  next  .£350,000  in  1866,  increasing 
the  issues  upon  securities  to  ,£15, 000,000.  An  increase  of 
£7 50, ooo  was  made  April  i,  1881  ;  ,£450,000  September  15, 
l887  ;  ,£250,000  February  8,  1889 ;  ,£350,000  January  29, 
!894;  ,£975,000  March  3,  1900;  £400,000  August  n,  1902  ; 
£275,000  August  10,  1903.  The  secured  circulation,  there- 
fore, now  stands  at  .£18,450,000  ($90,000,000).  Lapsed 
issues  up  to  1914  were  £8, 126, 445, — £"4,818,802  for  197 
private  banks  and  £"3,307,643  for  67  joint-stock  banks. 

No  provision  was  made  for  strengthening  the  security  of 
the  issues  of  private  banks,  except  the  absolute  limit  put 


1  The  limitation  to  two-thirds  of  the  cancelled  issues  was  based 
upon  the  theory  that  these  issues  had  been  protected  by  one-third 
their  amount  in  bullion,  which  would  be  released  for  circulation, 
thus  keeping  the  amount  of  circulation  intact.  The  utter  disregard 
of  banking  principles  embodied  in  the  law  is  indicated  by  this  as- 
sumption, which  completely  ignores  the  necessity  for  a  reserve 
against  general  liabilities. — Gilbart,  II.,  loo. 


124          HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

upon  the  amount,  for  it  was  not  intended  to  foster  their 
development.  A  banker  who  ceased  to  issue  his  own  notes 
was  not  permitted  to  resume  the  issue,  and  if  two  or 
more  banks  became  united  and  the  number  of  partners  of 
the  united  bank  exceeded  six  their  power  of  note  issue  was 
to  cease.  The  country  bankers  were  required  to  permit 
their  books  to  be  inspected  by  a  government  officer,  but  this 
was  apparently  to  prevent  an  excess  of  issue  rather  than  to 
afford  any  other  sort  of  security  to  the  public.  The  country 
banks  have  been  slow  to  leave  the  field,  as  the  figures  of 
their  circulation  demonstrate.  Fifty-six  private  banks  were 
still  issuing  ,£2,220,048  and  35  joint  stock  banks  were  still 
issuing  £ i,  974, 202  in  notes  at  the  beginning  of  1896  ;  but 
by  1914  the  number  had  fallen  to  eight  private  banks  and  six 
joint  stock  banks,  with  issues  respectively  of  ,£334,615  and 
,£170,587.  These  notes  are  not  legal  tender  and  the  banks 
issuing  them  are  not  required  to  publish  accounts. 

The  operation  of  the  Bank  Act  of  1844  was  put  to  an  early 
test  by  the  crisis  of  1847  and  the  result  was  a  complete  fail- 
ure upon  two  essential  points.  The  operation  of  the  act 
neither  prevented  the  speculation  which  is  the  cause  of  pan- 
ics, nor  reduced  the  issue  of  notes  to  correspond  with  the 
export  of  gold.  Inquiries  were  made  by  both  the  House  of 
Commons  and  the  House  of  Lords,  at  the  meeting  of  Parlia- 
ment after  the  panic  and  the  friends  of  the  Act  of  1844  made 
an  earnest  effort  to  rescue  it  from  the  discredit  which  the 
panic  had  cast  upon  it.  The  committee  of  th'e  House  of 
Commons  reported  in  favor  of  continuing  the  act  in  effect, 
but  the  House  of  Lords'  committee  spoke  in  severe  terms  of 
its  operation.  The  failure  of  the  act  in  the  important  re- 
spect of  preventing  commercial  convulsions  was  frankly 
admitted  in  the  debate  in  the  Commons  by  Sir  Robert  Peel. 
It  had  neither  "put  a  check  on  improvident  speculation," 
in  the  language  of  the  Lords'  committee,  nor  afforded  ' '  se- 
curity against  violent  fluctuations  in  the  value  of  money." 
The  law  was  framed  to  arrest  commercial  expansion  by  limit- 
ing the  means  for  carrying  on  commercial  transactions.  It 
failed  absolutely  in  this  object,  because  such  operations  can 


SECOND   CENTURY  OF  THE  BANK  OF  ENGLAND.    12$ 


be  carried  on,  and  usually  are  carried  on,  by  other  means 
than  bank-notes.  It  succeeded  in  checking  the  expansion 
only  when  other  forms  of  credit  had  been  swept  away  by 
distrust  and  expansion  of  note  issues  to  fill  their  place  was 
absolutely  needed  to  prevent  overwhelming  commercial  dis- 
aster. It  did  not  prevent  expansion,  in  simple  terms,  when 
expansion  might  do  harm  ;  it  prevented  it  absolutely  when 
it  might  have  done  good. 

It  was  the  theory  of  the  supporters  of  the  act,  that  the 
currency  would  fluctuate  in  exact  accordance  with  the  fluctu- 
ations of  a  metallic  currency  by  the  self-acting  provision  for 
the  issue  of  notes  only  in  exchange  for  gold  and  the  issue  of 
gold  in  exchange  for  notes.  Both  sides  in  the  discussion 
of  the  bill,  when  it  was  pending  in  Parliament,  seem  to  have 
made  the  incredible  blunder  of  overlooking  the  fact  that 
gold  could  be  obtained  by  the  presentation  of  checks.  This 
was  exactly  what  happened  in  1847  an^  the  effect  upon  the 
outstanding  note  issues  and  the  bullion  in  the  bank  at 
different  dates  during  the  April  pressure  is  indicated  in  the 
following  table  : 


NOTES    HELD    BY    THE 
PUBLIC. 

NOTES   IN    THE    BANK- 
ING  RESERVE. 

BULLION   IN  THE 
BANK. 

Aug.   29,   1846 

Dec.  19,  1846 
Jan.  9,  1847 
Feb.  20,  1847 
Mar.  20,  1847 
Apr.  10,  1847 

£20,426,000 
19,549,000 
2O,837,OOO 
I9,482,OOO 
19,069,000 
2O,243,OOO 

^9,450,000 
8,864,000 
6,715,000 
5,917,000 
5,419,000 
2,558,OOO 

£l6,366,000 
15,163,000 
I4,3O8,OOO 
I2,2I5,OOO 
11,232,000 
9,867,OOO 

The  bank,  therefore,  saw  its  bullion  decreasing  on  the  one 
hand  and  its  banking  reserve  decreasing  on  the  other  hand, 
while  gold  and  notes  poured  out  of  the  banking  department 
in  the  discharge  of  its  obligations.  The  banking  reserve 
was  chiefly  in  notes  which  had  been  obtained  by  the  sur- 
render to  the  issue  department  of  such  gold  as  was  received 
on  deposit,  but  the  payment  of  these  notes  to  customers 
either  swelled  the  note  circulation  or  reduced  the  gold  in  the 
bank,  by  just  the  amount  of  the  payment.  The  effect,  as 
Mr.  John  Stuart  Mill  pointed  out  in  his  testimony  before 


126          HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

the  Committee  of  the  House  of  Commons,  was  a  double 
action,  which  required  each  department  of  the  bank  to  take 
measures  for  self- protect! on  and  made  the  bank's  action  on 
the  money  market  "  as  violent  on  a  drain  of  three  millions, 
as  would  have  been  required  on  the  old  system  for  one  of 
six."  The  banking  department  might  be  completely 
wrecked  by  the  exhaustion  of  its  note  reserve,  without  the 
power  it  formerly  possessed  to  draw  upon  the  whole  re- 
sources of  the  bank  for  help. 

It  was  fortunate  in  many  respects  that  the  Act  of  1844 
failed  to  operate  to  contract  the  domestic  circulation  as  was 
expected.  Such  an  event  would  only  have  added  to  the  in- 
tensity of  the  panic  and  made  the  suspension  of  the  act  and 
the  issue  of  additional  notes  more  imperative.  Such  con- 
traction and  such  absence  of  expansion  as  actually  occurred 
invited  a  run  upon  the  bank  for  gold  and  notes  which  wrould 
not  have  occurred  under  former  conditions.  Bank  of  Eng- 
land notes  were  a  legal  tender  except  at  the  bank  and  were 
largely  employed  in  the  reserves  of  the  country  banks.  The 
absolute  limit  on  the  supply  had  the  double  effect  of  frighten- 
ing the  public  into  withdrawing  their  deposits  from  the 
banks  for  hoarding  before  the  supply  was  exhausted  and  of 
driving  the  banks  to  withdraw  their  deposits  from  the  Bank 
of  England  for  hoarding  against  this  demand  by  the  public. 
If  they  could  not  get  notes  under  such  circumstances,  they 
would  take  gold,  and  the  reduction  of  the  note  circulation  in 
the  meantime  would  only  have  increased  the  pressure.  The 
demand  for  notes,  so  long  as  their  convertibility  was  unques- 
tioned, was,  of  course,  immensely  increased  by  the  destruc- 
tion of  credit.  Hoarding  operated  to  reduce  the  visible 
quantity  of  notes  at  the  very  moment  that  the  disappearance 
of  commercial  paper  as  a  medium  of  circulation  increased 
the  necessity  for  them.  The  terrible  pressure  thus  applied 
by  the  Act  of  1844  to  the  commercial  community  compelled 
the  sale  of  goods  and  securities  in  foreign  markets  at  any 
sacrifice  which  would  bring  the  ready  currency  withheld  by 


1  Political  Economy,  B.  III.,  Ch.  xxiv.,  Sec.  4. 


SECOND   CENTURY  OF  THE  BANK  OF  ENGLAND.    I2/ 

the  operation  of  the  Bank  Act.  The  operation  of  the  law, 
therefore,  meant  an  absolute  loss,  not  merely  in  the  nominal 
sense  of  money  denominations,  but  in  the  real  sense  of  sur- 
rendering more  English  commodities  for  a  given  quantity 
of  foreign  commodities  than  would  otherwise  have  been 
required.  l 

The  chief  contention  which  was  left  to  the  friends  of  the 
Act  of  1844,  after  the  rude  disillusionment  of  the  panic  of 
1847,  was  tnat  tne  act  nad  maintained  beyond  doubt  "  the 
convertibility  of  the  note. ' '  They  argued  that  under  former 
conditions  and  in  previous  panics,  the  bank  had  been  drained 
of  gold  as  well  as  of  its  banking  reserve,  the  two  not  being 
then  separated,  and  that  the  ultimate  redemption  of  the  notes 
in  gold  had  been  threatened.  From  a  practical  point  of  view, 
there  was  perhaps  some  force  in  this  claim  in  behalf  of  the 
act. a  The  claim  is  subject  to  the  two  conditions,  however, 
that  a  better  knowledge  of  the  rules  of  banking  had  come 
into  operation  since  the  earlier  panics  and  that  theoretically 
the  * '  convertibility  of  the  note ' '  was  not  perfectly  assured. 
It  is  doubtful,  indeed,  if  convertibility  could  have  been 
maintained  if  there  had  never  been,  either  in  1847,  I^57,  or 
1866,  any  suspension  of  the  Bank  Act.  Loss  of  convertibility 
would  not  have  come  primarily  from  distrust  of  the  notes  or 
of  the  credit  of  the  bank,  but  from  the  pressure  for  money 
by  depositors  upon  the  private  banks  and  joint  stock  banks 
which  kept  their  reserve  with  the  Bank  of  England.  They 
would  have  come  upon  the  bank  with  a  rush  for  the  pay- 
ment of  their  deposits  and  the  point  might  very  soon  have 
been  reached  where  the  bank  had  only  public  securities  as 


1  Gilbart,!.,  337-38. 

2  Mr.  Mill  insists  that  the  convertibility  of  the  note  "  would  have 
continued  to  be  maintained,  at  whatever  cost,  under  the  old  system," 
and  remarks  that  the  suspension  of  the  banking  department,  "in- 
volving, as  it  would,  the  probable  stoppage  of  every  private  banking 
establishment  in  London,  and  perhaps  also  the  non-payment  of  the 
dividends  to  the  national  creditor,  would  be  a  far  greater  immediate 
calamity  than  a  brief  interruption  of  the  convertibility  of  the  note." 
— Political  Economy,  B.  III.,  Ch.  xxiv.,  Sec.  3,  note. 


128          HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

the  guarantee  of  its  circulation.  The  effort,  in  other  words, 
to  keep  the  bank  standing  a  solitary  monument  of  unimpaired 
credit  when  every  other  part  of  the  credit  system  of  the 
country  had  fallen  a  mass  of  ruins  around  it  could  not 
have  succeeded.  This  was  the  logical  meaning  of  the 
propositions  of  those  who  insisted  that  the  Act  of  1844  main- 
tained "the  convertibility  of  the  note,"  so  far  as  they  had 
any  definite  meaning,  and  it  was  a  proposition  which  was 
utterly  chimerical. 

If  the  limitations  of  the  Act  of  1844  have  been  of  any  value 
to  the  English  people,  it  has  probably  been  in  driving  them 
to  the  adoption  of  substitutes  for  circulating  notes  and  to  the 
extension  of  deposit  banking.  England  was  sufficiently  far 
advanced  in  1844  in  the  use  of  instruments  of  credit  to  make 
the  restrictions  of  the  Bank  Act  of  much  less  importance  than 
such  restrictions  would  have  proved  in  a  new  and  undevel- 
oped country.  One  of  the  devices  adopted  in  London  for 
promoting  the  movement  of  capital  was  the  Cheque  Bank. 
Money  was  received  by  this  bank  on  deposit,  and  books  of 
checks  were  issued  for  even  denominations,  which  might  be 
filled  in  for  less  than  the  denomination  but  not  for  more. 
The  face  value  of  the  checks  issued  did  not  exceed  the 
depositor's  credit,  so  that  the  receiver  of  such  a  check  had 
the  assurance  of  the  bank  that  the  depositor's  account  was 
not  overdrawn.  Such  checks  were  made  payable  by  the 
Cheque  Bank  only  through  some  other  banker  and  not  at 
the  counter  of  the  bank,  thereby  escaping  the  prohibition  of 
the  law  against  promissory  notes  payable  to  bearer  on  de- 
mand. The  checks  passed  between  individuals  for  cash  and 
the  Cheque  Bank  established  relations  with  some  1500 
domestic  and  foreign  banks  which  agreed  to  receive  and 
cash  its  checks.  Several  railways  and  other  companies  re- 
ceived these  checks  as  cash  and  they  proved  convenient  for 
transmission  through  the  mails.1  The  Cheque  Bank,  there- 
fore, put  in  operation  a  sort  of  emergency  currency,  outside 
the  law,  if  not  in  violation  of  law,  which  has  been  resorted 


1  MacLeod,  Theory  and  Practice  of  Banking,  II,  374-75. 


SECOND   CENTURY  OF  THE  BANK  OF  ENGLAND.     12$ 

to  in  other  countries  only  under  the  pressure  of  commercial 
distress. l 

A  much  more  important  and  scientific  step  than  cast-iron 
rules  of  circulation  was  adopted  by  the  Bank  of  England  for 
the  protection  of  its  gold  reserve  after  the  crisis  of  1857. 
This  step  consisted  in  raising  the  rate  of  interest  rapidly  by 
degrees  of  one  per  cent,  at  a  time,  instead  of  fractions  of  one 
per  cent.,  in  order  to  arrest  the  export  of  gold.  The  increas- 
ing ease  and  cheapness  of  communication  had  destroyed  the 
value  of  differences  of  a  fraction  of  one  per  cent.,  when  this 
fraction  was  divided  into  fractions  of  a  year,  in  attracting 
gold  from  foreign  countries  or  arresting  its  departure.  The 
theory  of  statesmen  and  students  of  political  economy  had 
generally  recognized  up  to  this  time  only  two  causes  of  the 
export  of  gold — payments  for  merchandise  and  the  pressure 
of  a  depreciated  currency.  The  bullion  brokers,  without 
spending  time  over  theories,  had  long  since  learned  by  obser- 
vation that  it  became  profitable  to  export  gold  when  interest 
rates  abroad  were  higher  than  at  home.  They  fabricated 
bills  of  exchange,  had  them  discounted  by  bankers,  took  the 
proceeds  in  gold  and  shipped  the  gold  to  the  point  where  it 
would  earn  the  highest  interest.  The  bills  fabricated  for 
this  purpose  had  the  character  of  accommodation  bills,  in 
that  they  represented  no  merchandise  transaction  and  were 
drawn  for  the  single  purpose  of  transferring  money  from  the 
place  where  it  was  cheap  to  the  place  where  it  was  dear,  in 
order  to  earn  the  higher  rate  of  interest. 

The  fact  and  possibility  of  such  shipments  of  gold  do  not 
seem  to  have  been  known,  or  at  least  fully  understood,  up 
to  this  time,  by  the  staid  old  merchants  who  formed  a  ma- 
jority of  the  board  of  directors  of  the  Bank  of  England. 
The  necessity  of  meeting  the  drain  by  rapid  advances  in  the 
rate  of  discount  was  first  set  forth  in  the  literature  of  political 
economy  by  Prof.  H.  D.  MacLeod,2  was  quickly  adopted  as 
the  true  theory  by  Mr.  Goschen,  and  put  in  force  by  the  bank 

1  For  a  similar  device  in  Austria,  see  the  closing  portion  of  Chapter 
ix.,  first  edition  of  this  work. 

2  Theory  of  Credit,  II.,  813-18. 

9 


130         HISTORY  Of  MODERtf  BANKS  OF  ISSUE. 

which,  on  this  occasion,  according  to  Mr.  Bagehot,  "  and  as 
far  as  I  know,  on  this  occasion  alone,"  made  "an  excellent 
alteration  of  their  policy  which  was  not  exacted  by  contem- 
porary opinion,  and  which  was  in  advance  of  it."  J  The 
results  were  even  more  striking  than  were  anticipated  by 
the  advocates  of  the  new  theory,  and  are  thus  summed  up 
for  the  next  few  years  by  Mr.  Bagehot : 

The  beneficial  results  of  the  improved  policy  of  the  bank  were  pal- 
pable and  speedy  :  we  were  enabled  by  it  to  sustain  the  great  drain 
of  silver  from  Europe  to  India  to  pay  for  Indian  cotton  in  the  years 
between  1862  and  1865.  In  the  autumn  of  1864  there  was  especial 
danger  ;  but  by  a  rapid  and  able  use  of  their  new  policy,  the  Bank  of 
England  maintained  an  adequate  reserve,  and  preserved  the  country 
from  calamities  which,  if  we  had  looked  only  to  precedent,  would 
have  seemed  inevitable.  All  the  causes  which  produced  the  panic  of 
1857  were  in  action  in  1864 ;  the  drain  of  silver  in  1864  and  the  preceding 
year  was  beyond  comparison  greater  than  in  1857  and  the  years  before 
it ;  and  yet  in  1864  there  was  no  panic.  The  Bank  of  England  was 
almost  immediately  rewarded  for  its  adoption  of  right  principles  by 
finding  that  those  principles,  at  a  severe  crisis,  preserved  public  credit.2 

The  great  expansion  of  English  banking  after  the  middle 
of  the  century  led  to  serious  doubts  as  to  the  capacity 
of  the  Bank  of  England  to  maintain  commercial  credit  in 
every  conceivable  emergency.  Mr.  Bagehot  pointed  out  in 
his  celebrated  work,  Lombard  Street,  more  than  twenty 
years  ago,  that  the  entire  fabric  of  English  credit  rested 
upon  the  gold  reserve  of  the  Bank  of  England;  The  reserve 
had  then  increased  somewhat  above  its  level  in  earlier  times, 
but  was  still  considered  by  many  as  affording  an  insufficient 
protection  for  the  great  volume  of  the  banking  business  of 
the  country.  The  private  and  joint  stock  banks  made  no 
effort  to  maintain  a  coin  reserve  of  their  own,  for  such  a 
policy  would  have  locked  up  their  capital  and  driven  them 
to  the  wall  in  the  fierce  competition  for  fractional  profits. 
They  carried  only  such  cash  as  was  needed  from  day  to  day 
for  ordinary  transactions,  and  relied  upon  their  deposits  with 

1  Lombard  Street,  Works,  V.,  118. 

2  For  a  temporary  failure  of  the  new  rule  to  act,  and  the  reason  for  it, 
see  account  of  the  crisis  of  1866.  in  Ch.  xxiii. 


SECOND  CENTURY  Of  Tf/E  BANK  Of  ENGLAND.    I  3  I 

the  Bank  of  England  for  cash  to  meet  emergencies.  The 
system  thus  created  was  graphically  called  "  the  one  reserve 
system,"  and  under  it  the  credit  of  the  entire  business  com- 
munity depends  upon  the  solvency  of  the  Bank  of  England.1 

Under  this  system  the  deposits  of  other  banks  at  the  Bank 
of  England  tend  to  increase  in  times  of  anxiety.  The  joint 
stock  and  private  banks,  in  the  country  as  well  as  in  the 
city,  instead  of  drawing  gold  and  notes  from  the  centre  to 
put  in  their  own  vaults,  as  is  done  by  the  banks  of  the 
United  States  in  times  of  stress,  obtain  rediscounts  at  the 
Bank  of  England  and  carry  the  proceeds  to  their  deposit 
accounts  there,  in  order  to  be  able  to  draw  checks  freely 
on  the  bank,  which  can  be  exchanged  for  notes,  if  desired. 
Thus,  in  1857,  bankers'  balances  increased  from  ^3, 400,000 
on  November  4th  to  ^5, 400,000  on  November  25th.  In 
1866,  in  one  week,  between  May  gth  and  May  i6th,  bankers' 
balances  rose  from  ,£5,000,000  to  ,£7,900,000,  and  in  1875 
there  was  an  increase  from  ,£7,274,000  on  May  igth  to 
^11,857,000  on  June  2d.a  In  1890,  when  separate  returns 
were  no  longer  published,  the  influence  of  the  bankers' 
balances  was  shown  by  the  increase  of  general  deposits 
from  ,£30,286,000  on  November  i2th  to  ,£36,365,000  on 
November  igth. 

The  characteristic  features  of  English  banking  in  recent 
years  have  been  the  extension  of  banking  privileges  and 
the  consolidation  and  growth  in  power  of  the  joint  stock 
banks.  The  latter  did  not  enjoy  the  privilege  of  limited 
liability  in  early  days  and  refused  to  avail  themselves  of  it 
when  it  was  granted  in  1858 ;  but  the  collapse  of  the  City  of 
Glasgow  Bank  in  Scotland,  with  the  accompanying  ruin 
of  many  shareholders,  as  told  hereafter,  led  most  of  the 
joint  stock  banks  to  accept  the  Act  of  1879,  authorizing  the 

1  The  Irish  aud   Scotch  banks  of  issue  hold  gold  funds,   which 
amounted  on  May  30,  1908,  to  ^"9,997,073,  but  this  gold  is  more  or 
less  tied  up  by  the  laws  governing  their  circulation,   and  calls  are 
almost  invariably  made  for  gold  upon  the  Bank  of  England  in  times 
of  stringency. 

2  Palgrave,  24-25. 


1 32  HISTOR  Y  OF  MODERN  BANKS  OF  ISSUE. 

creation  of  a  reserve  liability  in  the  form  of  uncalled  capital 
as  the  limit  of  obligation  of  shareholders  in  case  of  failure. l 
This  definition  of  the  obligations  of  the  shareholder  led 
wealthy  men,  who  had  formerly  stood  aloof,  to  invest  in 
bank  shares,  and  within  the  next  thirty  years  joint  stock 
banking  resources  were  more  than  doubled.  The  number 
of  banking  oflices  open  to  the  public  in  England  and 
Wales  increased  from  1779  in  1872  to  6973  in  1913,  while 
in  the  United  Kingdom  as  a  whole  the  increase  was  from 
2924  in  1872  to  4460  in  1886,  5612  in  1894,  6512  in  1900,  and 
9116  in  1913.  Even  with  the  great  increase  in  number  of 
offices  in  England  and  Wales,  the  equipment  reached  only 
one  office  to  5173  of  the  population  in  1913.  This  was  below 
the  figure  for  Scotland  in  1872,  which  was  one  office  to  4137 
people,  and  which  rose  in  1913  to  one  office  for  3790  people.2 
While  this  great  improvement  in  the  accommodation  of 
the  public  was  taking  place,  the  number  of  banks  was 
diminishing.  Forty-two  banks  in  the  United  Kingdom  were 
absorbed  by  others  from  1877  to  1886,  90  from  1887  to  1895, 
and  more  than  100  from  1896  to  1907. 3  One  of  the  causes 
of  these  amalgamations,  especially  where  country  banks 
were  absorbed  by  I^ondon  banks,  was  the  low  rates  for 
money  which  prevailed  in  the  city  from  1892  to  1896.  The 
country  rate,  being  more  steady,  afforded  a  larger  profit  to 
the  city  bank,  while  the  country  bank  benefited  by  the 
addition  to  prestige  and  capital  resulting  from  absorption, 
which  permitted  a  larger  extension  of  business.  Some  of 
the  smaller  Condon  banks,  on  the  other  hand,  yielded  to  the 
pressure  for  concentration  by  union  with  large  provincial 
banks,  which  thus  obtained  the  benefits  of  I/mdon  offices 
and  admission  to  the  clearing  house.*  Finally,  began  in 


1  Sykes,  98. 

2  London  Bankers'  Magazine,  February,  1914,  XCVII.,  170. 

8  The  number  of  banks  stated  as  in  operation  differs  somewhat 
according  to  the  classes  dealt  with.  Straker  states  the  number  of 
joint  stock  banks  in  1849,  in  England  and  Wales,  at  99;  in  1892,  102; 
and  in  1902,  68. — The  Money  Market,  80. 

4  Sykes,  102-103. 


SECOND  CENTURY  OF  THE  BANK  OF  ENGLAND.    133 

recent  years  the  union  of  large  joint  stock  banks  and  private 
bankers  in  London .  Oat  of  these  various  measures  of  con- 
solidation have  come  some  of  the  largest  banking  houses  in 
the  world.  The  London,  City,  and  Midland,  an  example  of 
the  entrance  of  a  provincial  bank  into  London,  had  at  the 
close  of  1913  assets  of  ^"108,584,213  and  overtopped  every 
other  institution  except  the  Bank  of  England.  The  absorp- 
tion of  four  important  banks  during  the  five  years  1909-13 
was  accompanied  by  an  increase  of  capital  and  surplus  to 
^8,048,650.  A  close  second  was  Lloyds  Bank,  with  capital 
and  surplus  of  ^7,208,672  and  total  assets  of  ;£  106,618, 948; 
while  the  third  largest  institution  was  the  London  County  and 
Westminster,  with  capital  and  surplus  in  1913  of ,£7,500,000 
and  total  assets  of  ^"104, 248,238. r 

With  the  readjustment  of  the  banking  situation  caused  by 
the  elimination  of  small  institutions,  new  amalgamations 
have  been  fewer  in  recent  years,  reaching  only  four  in  1908; 
six  in  1909;  five  in  1910;  three  in  1911;  one  in  1912;  and 
three  in  1913. 

The  total  resources  of  the  banks  of  the  United  Kingdom 
and  Ireland  at  the  close  of  the  year  1913  were  in  excess  of 
;£i,  350, 000,000.  The  banks  of  England  and  Wales  alone 
showed  total  assets  of  ^1,116,487,779,  of  which  ^286,279,374 
was  in  cash  on  hand,  on  call,  or  at  short  notice;  ^593,791,336 
was  in  bills  discounted,  advances,  and  loans;  and  investments 
in  securities  were  ^164, 197,691.  On  the  side  of  liabilities, 
the  deposits,  current  accounts,  and  note  circulation  represented 
^957,788,930  and  capital  and  reserve  funds  ^"105,608,950. 
The  total  assets  of  the  Scotch  banks  were  ^158,664,623, 
which  included  cash  on  hand  and  at  short  notice  to  the 
amount  of  ^38, 749, 685;  bills  discounted,  advances,  and  loans, 
,£75,963,053;  and-  investments,  ;£34>o24>335-  On  the  side  of 
liabilities,  the  deposits,  current  accounts,  and  note  circulation 

1  In  April,  1914,  Lloyds  absorbed  the  Wilts  and  Dorset  Banking 
Company  with  resources  of  about  £14,000,000,  and  in  June,  1914,  the 
London  City  and  Midland  arranged  to  take  over  the  Metropolitan 
Bank  of  England  and  Wales,  with  assets  of  about  £13,000,000. 


134  HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

were  ,£135,060,895  and  capital  and  reserve  funds  £17,496,450. 
The  banks  of  Ireland  showed  total  assets  of  ,£90,904,781,  of 
which  cash  on  hand  and  at  short  notice  was  ,£16,713, 526; 
bills  discounted,  advances,  and  loans,  .£49.407,521;  and  in- 
vestments, ,£23,934,664.  On  the  side  of  liabilities,  the  de- 
posits, current  accounts,  and  circulation  were  £78,953,230  and 
capital  and  reserve  funds  ,£11,095,230.  Total  liabilities  on 
account  of  deposits,  current  accounts,  and  circulation  for  all 
British  banks,  including  small  amounts  for  the  Isle  of  Man, 
were  £i,  172,725, 299;  discounts,  advances,  and  loans  were 
.£719,284,295;  and  investments,  ,£224,486,077. 

From  this  extreme  concentration  of  banking  resources  has 
arisen  much  controversy  whether  the  cash  kept  by  the  Bank 
of  England  is  sufficient  in  amount  to  support  such  a  mass  of 
credit,  and  whether,  if  it  is  not  sufficient,  larger  reserves  in 
coin  should  not  be  kept  by  the  joint  stock  and  private  banks. 
The  experience  of  three  crises  since  the  Bank  Act  of  1844 
has  given  serious  warning  of  the  shock  which  would  come  to 
every  British  interest  if  the  Bank  of  England  should  prove 
inadequate  to  support  the  fabric  of  British  credit  and  to  sup- 
ply all  foreign  demands  for  gold.  Mr.  Bagehot  fixed  "the 
apprehension  minimum,"  below  which  the  bank  reserve 
could  not  go  without  exciting  alarm,  at  .£10,000,000,  and 
he  maintained  that  measures  to  protect  the  reserve  should 
begin  to  be  taken  when  it  dropped  below  .£15,000,000.  The 
reserve  was  gradually  strengthened  by  the  accumulation  of 
gold  and  by  the  financial  blunders  of  other  countries  until  it 
stood  in  1891  at  ,£22,295,403;  but  this  expansion  no  more 
than  kept  pace  with  the  expansion  of  credit  and  did  not 
diminish  apprehension  for  the  future.  Mr.  Goschen,  the  dis- 
tinguished financier  who  has  several  times  acted  as  Chan- 
cellor of  the  Exchequer,  proposed  a  plan  in  1891  for  issuing 
.£1  notes  upon  a  reserve  consisting  of  four-fifths  gold  and 
one-fifth  securities.  The  purpose  of  the  plan  was  to  sub- 
stitute the  notes  for  gold  in  the  hands  of  the  public,  and  to 
draw  the  gold  into  the  bullion  reserve  of  the  bank.  Mr. 
Goschen  proposed,  if  the  bullion  in  the  bank  was  raised  by 


SECOND  CENTURY  OF  THE  BANK  OF  ENGLAND.  135 

this  means  to  ^"30,000,000,  to  "  give  certain  additional  powers 
of  issue  in  times  of  emergency,"  by  authorizing  the  bank  to 
strengthen  the  reserve  in  the  banking  department  by  the 
issue  of  additional  notes  against  securities,  on  paying  to  the 
government  a  high  rate  of  interest,  to  be  fixed  by  law.  Mr. 
Goschen's  proposals  were  much  discussed,  but  did  not  result 
in  definite  action.  Other  proposals  at  various  dates  proved 
equally  abortive.1 

Agitation  of  the  subject  was  renewed  in  1906  and  acquired 
new  vigor  from  the  pressure  caused  on  the  London  money 
market  by  the  American  crisis  of  the  next  year.  Attention 
then  began  to  be  called  to  the  deposits  in  the  post-office 
savings  banks,  which  from  ^80,579,641  in  1893  increased  to 
,£155,996,446  in  1906.  It  was  pointed  out  that  these  deposit 
accounts  constituted  a  point  of  attack  exposed  to  extreme 
danger  in  case  alarm  should  be  spread  among  the  poor  or 
ignorant  by  a  financial  crisis.  Against  these  deposits,  which 
were  invested  in  securities,  the  government  kept  no  reserve 
at  all,  and  was  compelled  even  under  ordinary  conditions 
to  borrow  from  the  Bank  of  England  on  deficiency  bills 
when  withdrawals  exceeded  deposits.2  A  plan  suggested  for 
strengthening  reserves  by  Mr.  Holden  of  the  London,  City, 
and  Midland  Bank  was  that  the  government  should  pay  off 
its  old  debt  to  the  bank,  upon  which  the  institution  was 
founded,  in  actual  gold,  which  should  be  added  to  the  re- 
serve, but  that  the  government  should  continue  to  pay  the 
bank  the  amount  of  the  interest  previously  paid  on  the  debt. 
It  was  argued  that  this  payment  could  not  be  construed  as  a 
subsidy  to  the  bank,  but  only  as  proper  provision  by  the 
government  for  the  protection  of  the  postal  savings  bank 
deposits.  While  cooperation  among  the  joint  stock  banks 
to  create  a  special  reserve  was  often  urged,  such  a  policy 
bristled  with  difficulties  arising  from  the  severity  of  com- 


1  Some  of  these  are  reviewed  by  Sykes,  in  the  new  edition  of 
Gilbert,  The  History,  Principles,  and  Practice  of  Banking,  II.,  430- 
440. 

1  London  Bankers'  Magazine,  April,  1908,  LXXXV.,  527. 


1 36  HISTOR  Y  OF  MODERN  BANKS  OF  ISSUE. 

petition.  So  seriously  was  the  situation  regarded,  however, 
that  in  the  spring  of  1908  the  subject  was  taken  under  con- 
sideration by  a  committee  of  bankers  and  by  a  special 
committee  of  the  London  Chamber  of  Commerce.1 

One  of  the  significant  features  of  the  growing  banking 
power  of  other  countries  was  the  impairment  of  the  power 
of  the  Bank  of  England  to  influence  the  flow  of  gold  by 
changing  the  discount  rate.  While  London  has  continued 
to  be  the  centre  upon  which  bills  of  exchange  have  been 
negotiated  from  all  over  the  world,  Great  Britain  has  ceased 
to  enjoy  her  old  monopoly  of  foreign  trade,  and  much  of  the 
banking  business  is  now  done  by  agencies  of  foreign  banks. a 
In  emergencies  the  London  market,  as  in  1889  and  1906, 
turns  to  the  Bank  of  France  for  gold.  Superimposed  upon 
this  menace  from  abroad  to  the  power  of  the  Bank  of  Bng- 
land  is  the  immensely  increased  banking  power  and  the 
increased  demands  of  the  British  market.  As  the  situation 
is  described  by  a  careful  student 3 : 

From  a  banking  position,  there  is  no  doubt  economy  in  making 
the  Bank  of  England  keep  the  reserve  of  the  bankers,  but  it  is 
equally  certain  that,  from  a  general  point  of  view,  the  doing  this 
tends  to  place  the  stress  of  every  pressure  which  occurs  always  on 
one  point — a  point  on  which  many  and  varied  needs  all  concentrate 
— demands  for  domestic  and  foreign  needs,  the  requirements  for  har- 
vest wages  and  annual  holiday-makers  in  England,  of  farmers  in 
Scotland,  of  dealers  in  Ireland,  the  requirements  of  great  nations 
forming  and  increasing  their  gold  circulations,  the  demands  for  gold 
for  export  as  well  as  for  the  internal  circulation  of  the  country. 

In  order  to  retain  control  of  a  market  in  which  so  many 


1  Condon  Bankers'  Magazine,  April,  1908,  LXXXV.,  512. 

2  It  was  declared  in    1904  by  Mr.  W.  R.  Lawson,  "  that   all  the 
London  banks,  discount  houses,  and  private  bankers  together  should 
hold  only  forty  millions  sterling  or  thereabouts  of  our  foreign  bills, 
while  they  credit  foreign  banks  with  a  holding  of  from  fifty  to  one 
hundred   millions   sterling,  is  an    anomaly  to   be  investigated."— 
British  Economics  in  1904,  226. 

3  Palgrave,  Bank  Rate  and  the  Money  Market,  41. 


SECOND  CENTURY  OF  THE  BANK  OF  ENGLAND.    137 

disturbing  factors  play  a  part,  the  Bank  of  England  has 
several  times  changed  its  discount  policy  and  adopted  other 
measures  to  influence  the  supply  of  floating  capital.  One 
of  the  most  frequent  of  these  devices  is  what  is  called  "  bor- 
rowing on  consols."  This  consists  in  the  sale  by  the  bank 
in  the  open  market  of  a  portion  of  its  holdings  of  consols  for 
cash  and  the  purchase  at  the  same  time  of  an  equal  amount 
of  consols  for  the  monthly  account.  The  effect  of  this 
operation  is  to  absorb  the  amount  of  cash  for  which  the 
consols  are  sold  and  thus  force  up  "  the  open  market  rate" 
for  money,  while  the  bank  gets  back  the  consols  at  the  time 
of  the  monthly  settlement.1 

Prior  to  1844  comparative  uniformity  prevailed  in  discount 
rates  at  the  Bank  of  England.  For  more  than  a  century, 
down  to  1839,  "the  bank  rate"  never  exceeded  five  per 
cent,  nor  fell  below  four  per  cent.  During  the  pressure  of 
1839  it  was  raised  for  some  months  to  six  per  cent.,  but  in 
January,  1840,  was  reduced  to  five  per  cent,  and  remained  at 
that  rate  or  at  four  per  cent,  until  the  passage  of  the  Act  of 
1 844."  At  that  time,  the  open  market  rate  being  not  above 
two  per  cent.,  the  bank  was  "  out  of  the  market."  It  was  in 
August,  1844,  that  the  bank  rate  was  reduced  to  two  and 
a  half  per  cent. ,  and  from  that  date  the  changes  in  rate  have 
been  more  numerous  than  at  any  other  bank  in  the  world. 
The  total  number  of  changes  from  1844  to  the  close  of  1900 
was  400,  of  which  by  far  the  greater  number  were  made 
after  the  change  of  policy  in  1857  already  referred  to.  Dur- 
ing the  thirty-eight  years  from  1857  to  tne  period  of  cheap 
money  in  1894  occurred  330  changes,  or  an  average  of  more 
than  eight  per  year.  The  year  1873  witnessed  twenty-four 


1  Of.  Nicholas,  in  Moody's  Magazine,  January,  1907,  III.,  158. 
Kaston  says  regarding  this  practice:  "It  is  difficult  to  understand 
how  such  capital  can  be  utilized  at  a  profit,  but  when  the  bank  gets 
control  of  the  market  it  is  able  to  obtain  more  discount  business, 
which  no  doubt  would  more  than  compensate  it  for  the  amount  paid 
as  interest  on  loans." — Banks  and  Banking,  150. 

8  Palgrave,  49. 


I  3  8  I/IS  TOR  Y  OF  MODERN  BA  NKS  OF  ISS  UE. 

changes  and  fifteen  other  years  ten  or  more  changes  each. 
The  frequency  of  the  changes  in  1873  was  due  to  the  large 
operations  in  bills  arising  out  of  the  payment  of  the  French 
war  indemnity  to  Germany.1  The  result  of  these  repeated 
variations  was  to  afford  a  low  rate  for  money  during  most 
of  the  period  covered.  A  rate  not  exceeding  two  and  a  half 
per  cent,  was  charged  during  6434  days,  from  1844  to  1900, 
or  more  than  one-quarter  of  the  time;  a  rate  not  exceeding 
three  per  cent,  was  charged  during  11,341  days,  or  more 
than  half  the  time  (including  the  lower  rate);  and  a  rate  not 
exceeding  four  per  cent,  was  charged  during  15,778  days,  or 
more  than  three-quarters  of  the  time.3 

Changes  in  the  discount  rate  at  lyondon  were  numerous 
during  the  early  years  of  the  twentieth  century,  the  average 
falling  only  once  prior  to  1908  as  low  as  three  per  cent.  The 
average  rate  in  1901  was  3.72;  in  1902,  3.33;  in  1903,  3.75; 
in  1904,  3.30;  in  1905,  3.00;  in  1906,  4.27;  in  1907,  4.93; 
in  1908,  3.00;  in  1909,  3.10;  in  1910,  3.72;  in  1911,  3.47; 
in  1912,  3.77;  in  1913,  4.77  per  cent.3  The  maximum  rate 
of  1905  was  four  per  cent.,  and  this  or  three  and  a  half 
per  cent,  prevailed  until  October,  1906;  but  then  began 
the  pressure  on  international  money  markets  which  forced 
an  advance  to  six  percent,  within  the  month  and  its  continu- 
ance into  January,  1907.  Seven  changes  in  the  rate  marked 
that  troubled  year;  but  the  average  was  only  a  fraction  be- 
low the  average  for  1913,  when  pressure  due  to  political 
uncertainties  was  intensified  by  the  persistent  efforts  of 
Germany,  France,  and  Russia  to  add  to  their  stocks  of  gold. 

The  higher  rates,  however,  after  1878  were  enforced  only 
upon  the  outside  public.  Private  bankers  and  brokers  ad- 
justed their  rates  so  promptly  to  changes  in  market  con- 
ditions, and  made  such  discriminations  between  first-class 
bills  and  ordinary  trade  bills,  that  the  Bank  of  England  felt 


1  Easton,  Banks  and  Banking,  132. 

2  Palgrave,  102. 

3  Bulletin  de  Statistique>  February,  1914,  LXXIII.,  233. 


SECOND  CENTUR  Y  OF  THE  BANK  OF  ENGLAND.     1 39 

called  upon  to  protect  itself  by  similar  measures.1  The  step 
taken  in  February,  1878,  was  to  announce  that  the  bank 
would,  when  occasion  required,  discount  for  customers  who 
transacted  business  exclusively  with  the  bank,  at  a  rate 
lower  than  the  advertised  official  rate.3  At  its  provincial 
branches  discounts  are  granted  at  the  ordinary  local  rate. 
Another  departure  was  the  arrangement  entered  into  in  1890 
with  the  Hampshire  County  Council,  by  which  the  funds  of 
the  Council  on  deposit  with  the  bank  were  to  be  loaned 
through  its  agency  and  the  profits,  less  a  commission,  given 
to  the  Council.3 

The  Bank  of  England  is  governed  by  a  court  of  twenty- 
four  directors,  and  a  governor  and  a  deputy  governor  who 
serve  for  a  term  of  one  year.  The  senior  director  who  has 
not  already  served  is  usually  made  governor  and  the  next  in 
seniority  deputy  governor.  Eight  of  the  directors  retire  every 
year,  but  these  are  usually  the  younger  ones,  so  that  the 
older  always  remain.  It  is  customary  to  choose  young  men 
for  vacancies  in  the  board,  so  that  they  will  be  still  in  the 
possession  of  physical  vigor  when  their  turn  comes  to  be 
governor.4  Bankers  in  the  strictly  English  sense,  lenders 
of  money  for  short  terms  on  commercial  paper,  are  not 
allowed  to  serve  on  the  board  of  directors,  but  this  rule 
does  not  exclude  the  leaders  of  finance  who  are  engaged 
in  other  branches  of  the  banking  business.  It  is  usually 
about  twenty  years  from  the  time  of  a  man's  entry  upon  the 
board  of  directors  until  he  is  reached  in  his  turn  as  governor, 


1  Sykes  declares  that  there  are  at  least  five  rates  in  London ;  but 
one  of  these  is  the  deposit  rate,  representing  the  allowance  to  de- 
positors by  the  joint  stock  and  private  banks.    This  is  usually  fixed 
one  and  a  half  per  cent,  below  the  Bank  of  Bngland  rate. — Banking 
and  Currency,  162-163. 

2  Palgrave,  55. 

3  It  was  stated  at  this  time  that  the  question  of  paying  interest  on 
deposits,  which  had  not  before  been  the  practice,  "  might  be  raised 
for  consideration." — Turner,  Chronicles  of  the  Bank  of  England, 

254- 

4  Bagehot,  Works,  V.,  136. 


1 40  HIS  TOR  Y  OF  MODERN  BA  NKS  OF  ISS  UE. 

and  it  is  rarely  that  a  director  is  made  governor  out  of  his 
turn  or  serves  more  than  two  years.  The  board  meets  with 
the  governor  and  the  deputy  every  Thursday  in  what' has 
become  historic  as  "  the  bank  parlor,"  to  pass  upon  the 
report  for  the  week. 

The  Bank  of  England  has  been  comparatively  free  from 
government  interference  since  the  time  of  Pitt.  It  receives 
the  public  deposits  and  performs  many  financial  operations 
for  the  government,  but  it  differs  from  many  Continental 
banks  in  the  sense  that  "  it  is  purely  the  banker  of  the  state, 
and  not  its  cashier,  and  as  such  maintains  with  it  the  same 
relations  as  with  the  individuals  and  companies  which  con- 
stitute its  clientage."  1  One  of  the  largest  operations  per- 
formed in  this  capacity  was  the  conversion  of  the  consolidated 
and  other  classes  of  three  per  cents,  in  1888.  These  securi- 
ties were  reduced  to  two  and  three-quarters  per  cent. ,  with 
the  provision  that  after  April  5,  1903,  the  rate  of  return 
should  fall  to  two  and  a  half  per  cent.  Out  of  a  total  sum  of 
^"590,824,407  dealt  with  by  the  Conversion  Act,  the  Bank 
of  England,  with  some  aid  from  the  Bank  of  Ireland,  had  by 
November  5,  1888,  converted  ^549,094,010.  2 

There  is  no  division  of  the  profits  of  the  bank  with  the 
state,  as  among  the  leading  Continental  banks,  and  only 
moderate  taxes  are  paid.  The  necessity  of  acting  as  guardian 
of  the  gold  reserve  of  the  country  has  kept  the  profits 
of  the  Bank  of  England,  however,  in  recent  years  be- 
low those  of  the  more  successful  joint  stock  banks.  The 
highest  dividends  paid  since  1866  were  eleven  per  cent, 
in  1891  and  ten  and  a  half  per  cent,  in  1879,  1882,  and 
1890.  Ten  per  cent,  was  paid  from  1897  to  I9°3»  inclu- 
sive, but  the  rate  in  more  recent  years  has  been  nine  per 
cent.3 


1  Noel,  I.,  232. 

8  Gilbart,  I.,  93.  The  remainder  was  disposed  of  under  various 
provisions  of  law. 

3  The  figures  for  each  year  from  1695  down  are  given  by  Gilbart, 
I.,  97. 


SECOND  CENTURY  OF  THE  BANK  OF  ENGLAND.    141 

The  measure  of  the  changes  in  the  bullion  in  the  bank  in 
recent  years,  as  well  as  the  state  of  the  other  leading  items 
of  the  bank's  accounts,  for  the  average  of  the  last  quarter  in 
each  year,  is  given  in  the  following  table  : 


YEAR. 

NOTES  IN 
CIRCULATION. 

DEPOSITS. 

SECURITIES. 

BULLION. 

l880 

^26,829,000 

^31,350,000 

^34,839,000 

^26,406,000 

1881 

26,237,000 

28,633,OOO 

37,O96,OOO 

2O,876,OOO 

1882 

26,35I,OOO 

27,4IO,OOO 

36,147,000 

20,751,000 

1883 

25,683,000 

29,205,000 

35,669,000 

22,355,000 

1884 

25,222,999 

29,346,720 

36,336,69! 

20,360,721 

1885 

24,621,423 

29,344,372 

34,643,349 

20,826,856 

1886 

24,691,913 

27,038,698 

33,895,673 

19,929,836 

1887 

24,209,867 

26,930,149 

32,508,224 

20,238,539 

1888 

24,405,030 

29,281,524 

35,977,745 

19,455,412 

1889 

24,460,836 

29,837,081 

36,301,144 

19,712,368 

1890 

24,732,153 

35,4M,I55 

39,168,647 

21,820,279 

1891 

25,510,059 

34,830,397 

38,607,719 

23,159,668 

1892 

26,039,500 

34,367,453 

36,809,048 

24,991,060 

1893 

25,778,436 

34,204,021 

35,543,067 

25,865,721 

1894 

25,528,878 

41,614,576 

32,937,638 

35,262,470 

1895 

26,090,666 

56,354,680 

40,996,456 

42,473,334 

1896 

26,672,217 

59,574,404 

42,393,798 

35,911,881 

1897 

27,422,525 

45,601,685 

42,242,939 

31,834,320 

1898 

27,311,327 

42,459,967 

39,283,485 

31,489,297 

1899 

28,479,023 

48,247,856 

46,145,806 

31,704,656 

1900 

29,638,602 

47,017,854 

44,851,587 

31,969,693 

1901 

29,630,620 

50,492,232 

44,714,890 

35,568,509 

1902 

29,315,670 

50,779,638 

47,055,875 

32,798,470 

1903 

28,631,341 

48,067,855 

44,553,523 

3T,539,°94 

1904 

28,051,886 

48,879,852 

42,594,067 

33,711,078 

1905 

29,002,873 

53,545,820 

50,033,036 

31,918,667 

1906 

28,676,871 

50,730,798 

48,501,268 

30,388,371 

1907' 

29,514,250 

49,131,248 

47,366,980 

29,753,540 

1908 

29,751,000 

61,527,000 

59,817,000 

29,411,000 

1909 

28,858,000 

60,993,000 

56,482,000 

31,836,000 

1910 

28,6lI,OOO 

55,963,000 

52,534,000 

30,549,000 

1911 

29,193,000 

6l,I23,COO 

57,186,000 

31,732,000 

1912 

29,272,000 

51,495,000 

53,8i5,ooo 

29,294,000 

I9T3 

29,6o8,OOO 

71,343,000 

65,337,ooo 

33,875,009 

1  Figures  from  1907  represent  the  average  of  the  last  week  of  the 
year. 


CHAPTER  VI. 

THE  SCOTCH    BANKING  SYSTEM. 

Its  General  Scope  and  Results— The  Bank  of  Scotland  and  the  Royal 
Bank — The  Failures  of  the  Ayr  Bank,  the  Western  Bank  and  the 
City  of  Glasgow  Bank — Advantages  of  Scotch  Banking  and  its 
Effect  upon  the  Habits  of  the  People  and  the  Prosperity  of  the 
Country — Branch  Banks  in  London  and  Limited  Liability. 

THE  Scotch  system  of  banks  of  issue  comes  nearer  to 
the  ideal  of  successful  free  banking  than  that  of  any 
other  country.  Absolute  freedom  in  note  issues 
reigned  for  over  one  hundred  years  in  Scotland,  and  during 
eighty  years  of  that  period  general  distrust  of  the  banking 
system  never  occurred,  small  notes  became  the  favorite 
medium  of  exchange  among  the  people,  and  the  deposits  in 
the  banks  absorbed  almost  the  entire  savings  of  rich  and 
poor  and  brought  within  the  circle  of  active  producing 
capital  the  entire  accumulations  of  the  country.  Such  de- 
fects as  were  disclosed  in  the  early  years  of  Scotch  banking 
were  corrected  with  experience,  and  the  few  departures 
which  have  taken  place  from  sound  principles  have  been 
such  as  to  suggest  no  change  in  the  established  practice  of 
the  majority  of  Scotch  banks,  but,  at  the  most,  some  official 
regulation  which  should  hold  all  to  the  rules  voluntarily 
adopted  by  the  oldest  banks  and  the  soundest  bankers.  The 
mania  for  restricting  note  issues  which  swept  over  the 
British  Parliament  in  1844  shut  the  circulation  of  the  Scotch 
banks  within  fixed  legal  limits,  and  limited  the  banks  of 
issue  to  those  already  in  existence,  but  left  untouched  their 
power  to  issue  small  notes  and  their  means  of  accommodat- 
ing the  people  of  Scotland  by  receiving  deposits. 

142 


THE  SCOTC ft  BACKING  SYSTEM.  143 

Banking  in  Scotland  was  inaugurated  by  the  system  of 
monopoly,  but  differed  from  all  earlier  banking  systems  en- 
joying monopoly  of  note  issues  in  the  fact  that  the  first 
joint  stock  bank  was  formed  by  private  persons  for  the  ex- 
press purpose  of  promoting  trade  and  not  for  supporting  the 
credit  of  the  government.  The  charter  of  the  Bank  of  Scot- 
land, which  was  organized  under  authority  of  an  act  of  the 
vScotch  Parliament  of  July  17,  1695,  was  framed  to  some  ex- 
tent on  the  model  of  the  charter  of  the  Bank  of  England  and 
made  it  illegal  for  any  other  company  to  set  up  the  business 
of  banking  for  twenty-one  years.  The  joint  stock  was  to  be 
1,200,000  Scotch  pounds,  the  equivalent  of  100,000  English 
pounds  sterling,  and  was  to  be  subscribed  in  amounts  of  not 
less  than  ^1000  Scotch  nor  more  than  ,£20,000  Scotch 
(equivalent  to  ^83  6s.  Sd.  and  £1666  13^.  4^.  English).1  The 
bank  was  allowed  to  lend  on  real  or  personal  security  at  not 
more  than  six  per  cent.,  but  was  prohibited  from  employing 
its  stock  or  profits  in  any  other  trade  or  commerce,  except 
that  of  lending  and  borrowing  money  upon  interest  and  the 
negotiation  of  bills  of  exchange.  The  company  was  pro- 
hibited from  purchasing  land  or  from  advancing  money  to 
the  government,  upon  the  anticipation  of  any  sums  to  be 
granted  by  Parliament,  except  those  upon  which  a  loan 
should  be  authorized  by  a  specific  act. 

The  Bank  of  Scotland  soon  encountered  the  opposition  of 
the  African  Company,  otherwise  known  as  the  Darien  Com- 
pany, which  was  organized  by  William  Paterson,  the  founder 
of  the  Bank  of  England.  The  Bank  of  Scotland  had  so 
little  confidence  in  its  ability  to  protect  its  monopoly,  that  it 
made  no  serious  effort  to  contest  the  legal  rights  of  its  rival, 
but  endeavored  to  strengthen  its  position  by  calling  in  two- 
tenths  of  its  capital,  of  which  one-tenth  had  been  originally 
paid  in.  The  African  company  issued  notes  with  great  im- 
prudence, lent  to  its  own  shareholders,  and  was  obliged  to 

1  The  coinage  of  Scotland  was  assimilated  with  that  of  England  by 
the  act  of  Union  in  1707,  and  the  Bank  of  Scotland  assisted  in  the 
operation  by  receiving  the  old  money  and  giving  new  money  or  their 
own  notes  in  return. 


144          HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

abandon  the  field  in  May,  1698.  The  Bank  of  Scotland 
repaid  to  their  shareholders  the  two-tenths  of  the  capital 
called  in  and  continued  for  several  years  without  a  rival.  No 
deposits  were  received  at  first  from  the  public,  but  notes  were 
issued  against  the  capital  of  the  denominations  of  ^5,  ^10, 
;£2O>  ^5°>  and  ;£ioo.  Notes  for^ i  were  first  issued  between 
1699  and  1704.  A  run  was  begun  in  December  of  the  latter 
year,  which  compelled  the  bank  to  suspend  specie  payments. 
A  meeting  of  the  proprietors  was  held  and  a  device  adopted 
which  is  still  of  interest  because  it  is  similar  to  the  existing 
laws  of  Canada  and  Germany  in  the  case  of  failed  banks. 
This  device  consisted  in  making  the  notes  bear  interest  until 
they  were  paid  and  resulted  in  keeping  the  notes  at  par. 
Payment  was  made  with  interest  in  less  than  five  months, 
by  means  of  a  new  call  upon  the  proprietors  for  one-tenth 
of  the  nominal  capital.  Another  run  upon  the  bank  was 
made  in  September,  1715,  when  the  rebellion  on  behalf  of 
the  Stuarts  broke  out,  and  the  withdrawal  of  coin  by  the 
presentation  of  the  notes  was  encouraged  by  the  bank  direc- 
tors in  order  to  prevent  the  seizure  of  the  coin  reserve  by  the 
insurgents.  The  bank  suspended  payment  after  most  of  the 
cash  had  been  withdrawn  and  gave  notice  again  that  the 
notes  would  bear  interest  until  paid.  The  monopoly  of 
banking  for  twenty-one  years  expired  in  1716  and  no  steps 
were  taken  to  renew  it. 

The  second  successful  bank  in  Scotland  was  formed,  as  in 
the  case  of  the  Bank  of  Venice  and  Bank  of  England,  by 
the  proprietors  of  the  public  debt,  which  the}'"  assumed  on 
the  union  with  Kngland.  An  act  which  was  passed  in  1719 
empowered  the  King  to  incorporate  the  proprietors  of  the 
debt  into  a  body  corporate,  which  was  organized  in  1724. 
The  new  corporation  endeavored  to  secure  admission  to  the 
Bank  of  Scotland,  upon  the  terms  of  increasing  the  capital 
of  the  united  bank  by  the  sum  of  ,£250,000, — the  principal 
of  the  debt, — and  the  division  of  the  annual  interest  of  ^10,- 
ooo  in  the  proportion  of  two-sevenths  to  the  shareholders  of 
the  bank  and  five-sevenths  to  the  holders  of  the  debt.  The 
bank  was  making  dividends  which  were  declared  by  rivals  to 


THE  SCOTCH  BANKING  SYSTEM.  145 

run  as  high  as  fifty  per  cent.,  and  they  replied  that  they  had 
no  legal  authority  to  increase  their  capital,  that  their  stock 
was  large  enough  for  the  banking  business  of  the  country, 
and  that  they  would  not  in  any  case  unite  with  the  holders 
of  the  debt  at  par  while  their  stock  was  worth  at  least  ten 
per  cent,  and  the  debt  only  paid  four  per  cent.  The  holders 
of  the  debt,  or  the  Equivalent  Fund,  as  it  was  called,  then 
petitioned  the  King  for  banking  powers,  which  were  granted 
on  May  31,  1727.  These  powers  were  not  granted  without 
powerful  opposition  from  the  old  bank,  whose  defenders 
declared  that  their  capital,  which  they  had  called  in  to  the 
amount  of  three-tenths,  making  an  aggregate  of  ,£30,000, 
was  sufficient  to  circulate  all  the  credit  that  could  be  re- 
quired in  Scotland.  The  last  call  made  for  the  payment  of 
capital  was  partly  paid  in  the  notes  of  the  bank.  This  raised 
a  great  outcry  from  unthinking  persons,  who  maintained 
that  the  payments  should  be  made  in  specie,  but  they  were 
answered  by  the  scientific  statement  that  ' '  bank-notes  are 
justly  reckoned  the  same  as  specie  when  paid  in  on  a  call  of 
stock,  because,  when  paid  in,  it  lessens  the  demand  on  the 
bank."1 

The  new  bank  was  known  as  the  Royal  Bank  of  Scotland 
and  began  business  on  December  8,  1727,  with  a  capital 
stock  of  ;£  1 51,000.  They  received  support  from  the  govern- 
ment by  the  deposit  of  ,£20,000  of  public  monies  and  their 
business  rapidly  extended.  The  Royal  Bank  is  entitled  to 
the  credit  of  the  invention  of  cash  credits,  the  unique  feature 
of  Scotch  banking  which  has  done  so  much  to  promote  the 
prosperity  of  Scotland  and  to  place  business  success  and 
wealth  within  the  reach  of  the  humblest  of  her  people. 
There  was  a  deal  of  friction  between  the  two  banks  during 
these  early  years  and  the  Bank  of  Scotland  introduced  a 
clause  into  their  notes  making  them  payable  at  the  discre- 
tion of  the  directors  at  the  end  of  six  months,  with  the 
interest  from  the  time  of  presentation  until  the  time  of  pay- 
ment, instead  of  payable  in  coin  on  demand.  This  practical 
suspension  of  redemption  on  demand  resulted  in  excessive 

1  MacLeod,  Theory  and  Practice  of  Banking •,  II.,  203. 


146          HISTORY  OF  MODERN  BANKS   OF  ISSUE, 

issues  of  notes,  not  only  by  the  two  leading  banks,  but  by 
private  banking  and  manufacturing  companies,  and  the  fall 
of  the  notes  below  par.  The  attempt  to  maintain  coin  re- 
demption was  carried  out  by  a  process,  which  is  described  in 
detail  by  Adam  Smith,1  of  collecting  coin  through  London 
agents  and  sending  it  down  in  wagons  to  Scotland.  Bills 
of  exchange  were  constantly  drawn  upon  London  to  cover 
coin  obligations  and  their  payment  was  often  provided  for 
only  by  drawing  fresh  bills.  The  fact  that  the  bank  paper 
was  below  par  led  to  the  constant  presentation  of  notes  for 
redemption  and  justified  Smith's  declaration  that  "  bringing 
gold  into  the  country  was  like  pouring  water  into  a  sieve,  or 
like  the  toil  of  Danaides."  The  two  principal  banks  soon 
saw  the  folly  of  this  method  of  doing  business  and  agreed  to 
combine  their  influence  to  obtain  an  act  of  Parliament,  which 
was  passed  in  1765,  prohibiting  the  issue  of  notes  with  the 
optional  clause,  making  all  such  notes  payable  to  bearer  on 
demand,  and  prohibiting  notes  under  twenty  shillings  ($5). 

The  Bank  of  Scotland  and  the  Royal  Bank  were  the  only 
chartered  banks  until  the  incorporation  of  the  British  Linen 
Company  at  Edinburgh  in  1746.  This  company  was  organ- 
ized for  the  purpose  of  promoting  the  linen  industry  by 
lending  money  to  the  manufacturers  and  as  the  Company 
was  thus  led  into  the  banking  business  it  soon  found  it  ex- 
pedient to  continue  as  a  banking  company  only,  under  the 
original  name.2  The  next  important  institution  founded  was 
the  Ayr  Bank,  which  distinguished  itself  by  a  radical  depart- 
ure from  the  methods  of  the  older  Scotch  banks.  The 
wonderful  expansion  of  Scotch  agriculture  and  industry 
after  the  failure  of  the  Jacobite  rebellion,  under  the  stimulus 
of  conservative  free  banking  and  the  system  of  cash  credits, 
was  not  rapid  enough  for  certain  restless  spirits  who  wished 
to  borrow  far  beyond  their  capital  or  credit.  The  Ayr  Bank 
was  formed  with  the  avowed  purpose  of  adopting  a  more 
liberal  policy,  and  the  course  of  the  older  banks  in  gradually 


Wealth  of  Nations,  Book  II.,  Ch.  ii.,  i,  302. 
Cunningham,  II.,  350. 


THE   SCOTCH  BANKING  SYSTEM.  147 

curtailing  the  discounts  of  a  group  of  speculators  who  were 
dealing  in  accommodation  paper  drove  all  this  class  of  busi. 
ness  to  the  new  bank.  The  result  was  the  over-issue  of 
notes,  which  came  back  so  rapidly  upon  the  bank  for  re- 
demption in  coin  that  it  was  necessary  to  draw  constantly 
upon  lyondon  and  to  incur  heavy  expenses  for  commissions 
and  interest.  As  Adam  Smith  describes  the  operations  of 
the  bank  : 

When  it  was  obliged  to  stop,  it  bad  in  the  circulation  about  ,£"200,000 
in  bank-notes.  In  order  to  support  the  circulation  of  those  notes, 
•which  were  continually  returning  upon  it  as  fast  as  they  were  issued 
it  had  been  constantly  in  the  practice  of  drawing  bills  of  exchange 
upon  London,  of  which  the  number  and  value  were  continually  in- 
creasing, and,  when  it  stopped,  amounted  to  upwards  of  ^600,000. 
This  bank,  therefore,  had  in  little  more  than  the  course  of  two  years 
advanced  to  different  people  upwards  of  ^800,000  at  five  per  cent. 
Upon  the  ^"200,000,  which  it  circulated  in  bank-notes,  this  five  per 
cent,  might  perhaps  be  considered  as  clear  gain,  without  any  other 
deduction  besides  the  expense  of  management.  But  upon  upwards 
of  ^600,000  for  which  it  was  continually  drawing  bills  of  exchange 
upon  London,  it  was  paying,  in  the  way  of  interest  and  commission, 
upwards  of  eight  per  cent.,  and  was,  consequently,  losing  more  than 
three  per  cent,  upon  more  than  three-fourths  of  all  its  dealings. 

The  Ayr  Bank  was  founded  by  a  company  which  com- 
prised the  Duke  of  Hamilton  and  many  other  wealthy  landed 
proprietors  and  it  was  supposed  that  their  estates,  which 
were  pledged  by  the  unlimited  liability  of  the  stockholders, 
would  suffice  to  maintain  the  notes  of  the  bank  at  par  and 
supply  it  with  coin.  The  failure  of  the  experiment  proved 
two  of  the  essential  principles  of  a  banking  currency — that 
no  greater  volume  of  notes  can  be  maintained  in  circulation 
than  the  convenience  of  business  requires,  and  that  landed 
security  is  not  the  equivalent  of  coin  in  maintaining  the  re- 
demption of  notes  on  demand  or  the  credit  of  a  bank.  The 
period  of  the  operation  of  the  Ayr  Bank  was  one  of  exten- 
sive speculation  and  large  Scotch  exports,  but  the  apparent 
prosperity  was  brought  to  a  sudden  halt  by  the  crisis  of  1772, 
which  began  in  L,ondon  on  June  loth,  and  caused  a  run  upon 


148          HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

the  Edinburgh  branch  of  the  Ayr  Bank  just  one  week  later 
The  bank  continued  its  payments  until  June  25th,  when  it 
was  compelled  to  suspend  and  its  great  mass  of  obligations 
was  discredited. 

The  Bank  of  Scotland  was  authorized  in  1774  to  double 
its  capital  stock,  and  began  in  this  year  the  policy  of  estab- 
lising  branches  which  has  become  so  striking  a  feature  of 
Scotch  banking.  Efforts  had  been  made  in  1696  and  again 
in  1731  to  establish  branches  in  Glasgow,  Aberdeen,  Dundee, 
and  one  or  two  other  places,  but  in  both  instances  proved 
unprofitable  and  were  abandoned  after  a  year  or  two.  The 
capital  of  the  Bank  of  Scotland  was  increased  in  1784  to 
,£300,000,  in  1792  to  ,£600,000,  in  1794  to  ,£1,000,000,  and 
in  1804  to  ,£1,500,000,  of  which  ,£i,ooo,oco>  was  paid  in. 
The  present  paid  up  capital  is  ,£1,250,000  and  the  nominal 
capital  ,£1,875,000.  The  capital  of  the  Royal  Bank  has  been 
raised  to  ,£2,000,000,  all  of  which  has  been  paid  in.  The 
capital  of  the  British  Linen  Company  is  ,£1,000,000,  all  paid 
in.  The  Commercial  Bank  was  founded  in  1810  as  the  bank- 
ing institution  of  the  Liberal  party,  with  a  paid-up  capital 
of  ,£1,000,000,  which  was  strengthened  later  by  a  reserve 
fund  of  ,£400,000.  The  nominal  capital  is  now  ,£5,000,000. 
These  four  banks — the  Bank  of  Scotland,  the  Royal  Bank, 
the  British  Linen  Company,  and  the  Commercial  Bank — 
are  the  oldest  institutions  now  in  existence.  The  other 
banks  of  issue  which  were  in  operation  when  the  Act  of 
1845  forbade  the  extension  of  the  system  were  for  the  most 
part  founded  as  late  as  1825,  the  date  of  the  foundation  of 
the  existing  National~Bank  of  Scotland  and  the  Abderdeen 
Town  and  County  Bank.  There  were  a  few  older  institu- 
tions which  have  since  ceased  to  exist,  among  them  being 
the  Perth  Banking  Company,  founded  in  1766  and  united 
with  the  Union  Bank  in  1857,  and  the  Dundee  Banking 
Company,  founded  in  1763  and  united  with  the  Royal  Bank 
of  Scotland  in  1864. 

The  strength  of  the  Scotch  banking  system  was  illustrated 
by  the  events  which  followed  the  suspension  of  specie  pay- 
ments in  England.  The  news  reached  Edinburgh  on  March 


THE   SCOTCH  BANKING  SYSTEM.  149 

i,  1797,  and  a  meeting  of  the  bank  officers  decided  that  it 
would  be  necessary  for  the  Scotch  banks  to  follow  the  example 
of  the  Bank  of  England.  There  were  symptoms  of  a  run 
for  a  few  days,  and  the  disappearance  of  specie  led  to  the  cut- 
ting of  £i  notes  into  quarters  to  afford  a  currency  for  small 
transactions.1  The  Lord  Provost  called  a  meeting  of  the 
principal  inhabitants,  who  resolved  to  support  the  credit  of 
the  banks  and  to  receive  their  notes  as  specie.  Banks  which 
had  been  in  the  habit  of  issuing  notes  were  allowed  to  issue 
notes  for  five  shillings  for  a  limited  period  and  confidence 
quickly  returned.  No  action  was  ever  brought  against  the 
banks  for  their  failure  to  pay  specie,  the  notes  were  received 
as  confidently  as  ever,  and  in  a  short  time  business  activity 
was  resumed  and  continued  throughout  the  long  Napoleonic 
wars.  The  banks,  in  the  language  of  the  report  to  the 
L,ords  in  1826,  "supported  themselves  from  1797  to  1812 
without  any  protection  from  the  restriction  by  which  the 
Bank  of  England,  and  that  of  Ireland,  were  relieved  from 
cash  payments. ' ' 

The  policy  of  the  English  Bank  Act  of  1844,  to  suppress 
the  evils  of  speculation  by  restricting  bank-note  circulation, 
was  extended  to  Scotland  in  I845,2  but  several  of  the  provi- 
sions regarding  the  Scotch  banks  differ  from  those  affecting 
the  English  banks.  The  banks  of  issue  existing  in  Scot- 
land at  the  time  of  the  passing  of  the  act  were  allowed  to 
retain  an  authorized  circulation  equal  to  the  average  during 
the  year  ending  on  the  ist  of  May,  1845.  They  were  also 
authorized  to  issue  additional  notes  when  fully  covered  by 
deposits  of  coin  at  the  head  office  or  principal  place  of  issue. 
Not  more  than  one-fifth  of  this  coin  deposit  was  to  be  in 
silver.  The  Scotch  banks,  therefore,  stood  upon  an  equality 
in  issuing  notes  upon  deposits  of  coin  beyond  the  authorized 
limit,  while  the  English  banks  except  the  Bank  of  England 
were  absolutely  limited.  No  new  bank  of  issue  could  be 
founded,  however,  in  Scotland.  The  authorized  circulation 
of  the  Scotch  banks,  as  ascertained  under  the  new  law, 

1  MacLeod,  Theory  of  Credit,  II.,  601. 

2  8  and  9  Victoria,  c.  38. 


ISO 


HISTORY  OF  MODERN  BANKS  OF  ISSUE. 


was  .£3,087,209.  The  limit  of  authorized  circulation  was 
reduced  by  the  suspension  of  the  Western  Bank  in  1857, 
which  had  an  authorized  limit  of  .£337,938,  and  the  similar 
suspension  of  the  City  of  Glasgow  Bank  in  1878,  which  had 
an  authorized  limit  of  ,£72,921.  These  reductions  fixed  the 
authorized  circulation  at  ,£2,676,350,  where  it  now  stands. 
The  union  of  two  Scotch  banks  is  permitted  by  the  Act  of 
1845,  and  the  retention  of  the  aggregate  circulation  of  both. 
Several  unions  of  this  kind  have  taken  place  without  chan- 
ging the  limit  of  the  authorized  circulation  for  the  Kingdom. 
The  average  circulation  of  the  Scotch  banks  for  the  four 
weeks  ending  July  25,  1908,  including  that  covered  by  coin, 
is  shown  in  the  following  table  : 

Circulation  of  the  Scotch  Banks. 


BANK. 

AUTHORIZED 

CIRCULATION. 

AVERAGE  CIR- 
CULATION   FOR 

AVERAGE  GOLD 
AND   SILVER 
HELD  FOR  FOUR 

WEEKS. 

Bank  of  Scotland  

/"T.AT.  /n8 

/™i  106  8^0 

6 

Royal  Bank  of  Scotland.  .  . 
British  Linen  Company  .. 
Com'l  Bank  of  Scotland.  . 

216,451 
438,024 
374,880 

1,037,057 
844,659 

957,335 

966,203 
594,767 
746,743 

Nat.  Bank  of  Scotland.  .  . 
Union  Bank  of  Scotland.  . 

297,024 
454,346 

802,561 
918,225 

642,923 

N.  of  Scotland  Banking  Co 
Clydesdale  Banking  Co..  . 

224,452 
274,321 

727,124 
747,195 

577,439 
609,410 

Total     

2,676,350 

7,230,986 

5,745,4io 

The  average  circulation  of  these  banks  for  February,  1914, 
was  ,£7,190,931,  of  which  ^5,009,068  was  in  notes  for  less 
than  £5. 

The  history  of  Scotch  banking  was  comparatively  unevent- 
ful after  the  restrictive  legislation  of  1845,  except  for  the  two 
great  failures  of  the  Western  Bank  in  1857  anc^  tne  City  of 
Glasgow  Bank  in  1878.  As  these  failures  have  sometimes 
been  treated  by  the  opponents  of  Scotch  banking  as  an 
impeachment  of  its  safety  and  success,  they  are  worthy  of 
some  attention  in  detail.  Both  occurred  in  years  when 


THE  SCOTCH  BANKING  SYSTEM.  151 

other  banking  institutions  and  business  houses  in  England 
and  other  parts  of  the  world  were  collapsing,  but  both  were 
the  result  of  methods  of  banking  so  reckless  and  unsound 
that  they  had  repeatedly  received,  before  the  failures,  the 
condemnation  of  other  Scotch  bankers.  The  Western  Bank 
was  founded  in  1832  and  in  the  twenty-four  years  of  its 
operation  lost  its  entire  capital  of  ,£1,500,000,  and  nearly 
as  much  more  from  its  other  assets.  The  Western  Bank 
from  the  outset  kept  in  I/mdon  a  reserve  which  was  much 
inferior  to  that  of  other  Scotch  banks  and  was  so  small  that 
its  drafts  were  dishonored  in  1834  by  its  I/mdon  agents. 
The  other  Scotch  banks  thereupon  refused  its  notes  and 
remonstrated  with  it  for  its  mismanagement.  The  directors 
notified  the  other  banks  on  October  30,  1834,  that  they  had 
resolved  to  invest  in  marketable  securities  a  sum  sufficient 
to  secure  themselves  in  the  future,  to  lessen  their  discounts, 
and  to  keep  sufficient  funds  to  meet  their  obligations.  The 
chartered  banks,  upon  this  pledge,  advanced  ,£100,000  to  the 
Western  Bank  to  enable  them  to  purchase  the  proposed 
securities.  But  the  management  of  the  Western  Bank  soon 
forgot  their  promises  and  returned  to  their  former  method 
of  business.  These  methods  were  so  objectionable  that 
when  they  applied  to  the  Board  of  Trade  in  1838  for  a  grant 
of  letters  patent,  the  other  banks  presented  a  joint  memorial 
against  the  grant.  This  memorial  declared  that  Scotland, 
during  the  periodical  convulsions  among  the  banks  of  Bng- 
land,  which  had  led  to  the  failure  of  several  hundreds,  had 
for  the  most  part  maintained  a  state  of  general  tranquillity. 
The  memorial  continued  : 

The  cause  of  this  is  notoriously  owing,  first,  to  the  large  capital 
employed  in  the  Scotch  banks,  and,  second,  to  the  system  of  admin- 
istration adopted.  Capital  alone,  as  has  been  recently  experienced 
in  England,  by  extending  the  scale  of  operations,  may  only  increase 
the  mischief.  In  the  like  manner  a  numerous  proprietary,  consti- 
tuting a  protection  to  the  public  against  eventual  loss,  may,  by  adding 
to  the  credit,  add  to  the  po"wer  of  such  an  institution  for  evil.  The 
safeguard  of  the  Scotch  system  has  been  the  uniform  practice  adopted 
of  retaining  a  large  portion  of  the  capital  and  deposits  invested  in 
government  securities,  capable  of  being  converted  into  money,  at  all 


152          HISTORY  OF  MODERN  BANKS  OF  ISSUE, 

times  and  under  all  circumstances.  This  requires  a  sacrifice,  because 
the  rate  of  interest  is  small,  and,  in  times  of  difficulty,  the  sale  in- 
volves a  loss,  but  it  has  given  the  Scotch  banks  absolute  security,  and 
enabled  them  to  pass  unhurt  through  periods  of  great  discredit.  .  .  . 

The  Western  Bank  was  established  in  the  year  1832,  and  the  prin- 
ciple on  which  it  has  avowedly  acted  has  been  to  employ  as  much  as 
possible  of  its  capital  and  assets  in  discounts  and  loans,  retaining 
only  the  cash  necessary  to  meet  its  current  engagements.  .  .  . 

It  will  be  quite  apparent  that  a  bank  that  can  employ  its  whole 
funds  in  this  manner  is  enabled  either  to  divide  a  larger  share  of 
profits  than  its  competitors,  or  to  do  business  on  more  favorable  terms  ; 
and  we  repeat,  that  if  the  only  consequence  of  this  was  to  increase  or 
diminish  the  dividends  of  the  rival  establishments,  it  would  be  of 
comparatively  small  importance,  but  in  its  results  it  endangers  the 
existence  of  every  bank  in  the  country  and  the  fortunes  of  a  large 
portion  of  the  community.  We  feel  that,  if  letters  patent  shall  be 
granted  to  this  bank,  after  what  has  passed,  it  will  be  a  public  sanc- 
tion and  countenance  of  a  new  and  mischievous  principle,  opposed 
to  the  banking  system  of  Scotland. 

The  charter  was  not  granted  and  as  the  result  of  keeping 
such  small  reserves  in  I/mdon  the  Western  Bank  was  again 
in  trouble  in  1847.  The  bank  was  then  compelled  to  bor- 
row ^300,000  of  the  Bank  of  Kngland  in  November  and 
December,  which  it  repaid  in  March,  1848.  A  somewhat 
more  cautious  policy  was  pursued  until  1852,  when  the  dis- 
counts of  the  bank  were  ^13,525,332  and  the  re-discounts 
were  ^407, 143.  The  bank  even  at  this  time  had  ,£356,000 
in  overdue  bills  and  held  a  number  of  life  insurance  policies 
as  security  for  dead  loans,  on  which  it  was  paying  the 
premiums.  A  reckless  policy  of  re-discounting  was  begun 
in  1852  which  expanded  the  re-discounts  in  1856  to  .£5,407,- 
363  with  ordinary  discounts  of  ^20,410,884.  The  most 
alarming  feature  of  the  bank's  affairs,  however,  was  loans  to 
four  firms  which  reached  an  aggregate  of  ,£1,603,725.  The 
character  of  the  bills  discounted  for  these  firms  is  shown  by 
the  fact  that  of  ,£402,716  in  bills  of  Macdonald  ,£398, 349 
were  dishonored  at  maturity,  and  the  results  for  the  other 
three  firms  were  only  a  little  better.  The  books  of  the  bank 
were  examined,  soon  after  the  general  meeting  in  June, 
,  by  request  of  the  directors  and  it  was  found  that  bad 


THE   SCOTCH  BANKING  SYSTEM.  153 

debts  to  the  amount  of  ,£573,000  were  carried  as  good  assets 
and  that  the  advances  to  shareholders  amounted  to  ,£988,487. 
It  was  found  that  the  four  firms  to  which  such  immense  ad- 
vances had  been  made  had  been  dealing  in  accommodation 
paper  and  that  the  Macdonalds  drew  upon  124  acceptors,  of 
whom  only  37  had  been  inquired  about  and  21  were  reported 
as  extremely  bad.  The  banks  stopped  the  accounts  of  these 
firms,  which  immediately  failed,  and  a  panic  resulted  on 
the  Stock  Exchange  on  October  zoth.  Depositors  began  to 
withdraw  their  accounts,  the  bank  was  unable  to  settle  its 
balances  through  the  clearing  house  and  on  Monday,  No- 
vember gth,  closed  its  doors. 

The  collapse  of  the  City  of  Glasgow  Bank  in  1878  was 
similar  in  its  character  to  that  of  the  Western  Bank  twenty- 
one  years  earlier  and  was  due  to  similar  causes.  The  City 
of  Glasgow  Bank  was  compelled  to  stop  temporarily  in  1857 
and  continued  to  be  suspected  of  reckless  management  from 
that  time  until  its  failure.  The  institution  had  fallen  into 
such  discredit  early  in  1878  that  the  bill  brokers  generally 
asked  and  received  an  extra  quarter  or  half  of  one  per  cent, 
over  the  market  rate  charged  other  banks  in  discounting  its 
acceptances.1  Distrust  finally  came  to  a  head  in  September, 
1878,  when  the  London  banks  found  increasing  difficulty  in 
getting  rid  of  acceptances  sent  them  by  their  correspondents 
in  India  and  ordered  their  agents  in  the  Bast  to  buy  no  more 
such  paper.  The  directors  of  the  City  of  Glasgow  Bank 
appealed  to  the  other  Scotch  banks  for  help  towards  the  close 
of  the  month  and  an  expert  accountant  was  set  to  work 
upon  their  books.  A  slight  examination  showed  that  nearly 
;£6, 000,000  had  been  lent  to  four  firms  and  that  the  books 
had  been  deliberately  falsified  for  not  less  than  three  years. 
The  other  banks  declined  to  give  any  assistance  and  the 
City  of  Glasgow  Bank  stopped  payments  on  Wednesday, 
October  2d.  The  news  was  received  very  quietly  in  Scot- 
land and  the  other  Scotch  banks  announced  that  the  notes  of 
the  failed  bank  would  continue  to  be  accepted  as  usual. 
They  also  made  an  arrangement  by  which  relief  was  given 

1  Gilbart,  II.,  365- 


154         HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

to  depositors  who  were  hampered  by  the  locking  up  of  their 
money  pending  the  settlement  of  the  bank's  affairs. 

The  heaviest  burden  of  loss  fell  upon  the  shareholders, 
whose  liability  was  unlimited  under  the  law  then  in  force. 
The  liquidators  were  compelled  to  institute  a  number  of  suits 
to  fasten  the  liability  fully  upon  the  shareholders  and  to 
defeat  attempts  to  transfer  stock.  Having  adjusted  the  list, 
they  made  a  call  for  ,£500  for  every  ,£100  of  stock  held,  and 
subsequently  made  another  call  for  ^2250  per  share  of  ,£100. 
The  result  of  the  first  call,  of  which  the  nominal  amount 
was  ,£4,200,000,  resulted  in  receipts  of  ,£2,409,066  at  the 
end  of  the  second  year  of  the  liquidation,  October  22,  1880. 
The  nominal  amount  of  the  second  call  was  ,£7,814,000,  upon 
shareholders  who  were  still  solvent,  and  the  amount  realized 
was  ,£3,405,452.  The  result  of  these  two  calls,  with  a  sum 
of  ,£5,851,657  realized  from  the  assets,  enabled  the  payment 
of  seventeen  shillings  in  the  pound  within  less  than  two 
years  and  payment  in  full  was  made  within  little  more  than 
a  year,  with  the  help  of  an  advance  from  the  other  Scotch 
banks,  to  creditors  willing  to  forego  interest  on  their  claims. 
While  the  creditors  thus  lost  almost  nothing,  the  great 
majority  of  the  shareholders  were  absolutely  ruined.  The 
majority  expressed  their  purpose  at  the  first  meeting  on 
October  22,  1878,  to  keep  faith  with  their  creditors,  and  they 
kept  the  pledge  so  well  that  when  the  two  calls  had  been 
made  the  holders  of  only  .£"88,722  out  of  the  capital  of 
;£i, 000,000  remained  solvent.  Criminal  proceedings  for  the 
falsification  of  the  books  were  begun  against  the  directors 
and  they  were  given  short  terms  of  imprisonment. 

The  narrative  of  the  transformation  of  the  unlimited 
banks  of  Great  Britain  into  limited  companies  relates  to 
English  banking  so  far  as  it  affects  some  of  the  great  English 
joint  stock  banks,  but  it  belongs  more  properly  to  the  history 
of  Scotch  banking  in  its  origin  and  in  its  relations  with  im- 
portant banks  of  issue.  The  agitation  of  the  subject  was 
the  direct  result  of  the  terrible  losses  suffered  by  the  stock- 
holders of  the  City  of  Glasgow  Bank  because  of  their  unlim- 
ited liability  for  the  obligations  of  the  bank.  The  law  of 


THE   SCOTCH  BANKING   SYSTEM.  155 

England,  which  prevailed  in  Scotland  after  the  union,  pre- 
sumed and  enforced  unlimited  liability  upon  corporations 
except  in  the  cases  where  special  charters  had  been  granted. 
There  was  much  opposition  to  extending  the  principle  of 
limited  liability  to  private  partnerships,  but  a  statute  of 
1855  (Chapter  133)  finally  authorized  the  formation  of  joint 
stock  companies  under  such  conditions.  Joint  stock  banks 
were  excluded  from  the  operation  of  this  law  and  the  exclu- 
sion was  continued  in  the  joint  stock  banking  act  of  1857. 
The  failures  of  that  year  led  to  an  enactment  of  1858,'  which 
admitted  banks  to  the  privileges  of  limited  liability  so  far  as 
concerned  their  general  obligations.  Banks  issuing  promis- 
sory notes,  however,  were  liable  for  the  amount  of  the  notes, 
without  limitation,  in  addition  to  the  sum  for  which  they 
might  be  liable  to  general  creditors.  This  act  was  merely 
permissive  and  required  banking  companies  which  took 
advantage  of  it  to  give  thirty  days'  notice  to  each  customer 
and  after  registering  under  the  act  to  post  conspicuously  at 
their  offices,  on  February  ist  and  August  ist  of  each  year,  a 
statement  of  their  liabilities  and  assets. 

The  Act  of  1858  would  have  averted  the  hardships  of  the 
stockholders  in  the  City  of  Glasgow  Bank  if  they  had  taken 
advantage  of  its  provisions  before  the  failure.  The  three 
older  Scotch  banks,  however,  held  special  charters  which 
limited  their  liability  and  the  others,  aside  from  the  natural 
indisposition  to  revise  their  constitutions,  feared  that  the 
effect  would  be  injurious  to  their  credit.  Thus  matters 
remained  until  the  collapse  of  the  City  of  Glasgow  Bank. 
Investments  in  bank  shares  were  recognized  by  the  law 
courts  in  Scotland  as  a  legitimate  investment  of  trust  funds, 
but  the  trustees  were  personally  liable  for  the  calls  made  by 
the  banks  as  well  as  to  their  clients,  and  many  were  ruined 
by  the  failure.  A  steady  selling  of  shares  began  all  over 
England  and  Scotland,  by  the  prudent  as  well  as  those  who 
were  carried  away  by  the  flurry  of  the  moment.2  The  shares 
of  the  three  senior  Scotch  banks  declined  about  ^55  on  an 

1  Statute  1858,  c.  91. 

2  Gilbart,  II.,  398- 


156    .     HISTORY  OF  MODERN  BANKS  OF  ISSUE. 
average,  while  the  shares  of  the  unlimited  banks  fell  about 


The  subject  of  permitting  banking  with  limited  liability 
under  different  conditions  from  those  imposed  by  the  Act  of 
1858  was  brought  up  in  Parliament  and  the  government  on 
April  2  1  ,  1879,  introduced  a  bill  for  the  purpose.  The  act  be- 
came law  '  after  a  good  deal  of  controversy  and  authorized  the 
increase  of  capital  stock  by  an  amount  equal  to  existing  shares 
or  some  multiple  of  their  value,  and  liable  to  be  called  up 
only  in  case  the  company  was  wound  up.  This  constituted  a 
reserve  liability,  which  placed  a  definite  fund  within  the 
reach  of  a  failed  bank  without  requiring  assessments  upon 
the  shareholders  to  the  full  amount  of  the  liabilities.  The 
principal  of  unlimited  liability  was  retained  in  regard  to 
note  issues  by  corporations  whose  original  charters  were 
unlimited.  Most  of  the  leading  English  banks  and  the 
unlimited  Scotch  banks  soon  registered  under  the  new  law. 
It  was  feared  that  the  adoption  of  limited  liability  would 
result  in  a  reduction  of  deposits,  but  this  fear  was  discovered 
to  be  unfounded  and  deposits  materially  increased  in  the 
limited  banks  within  the  next  few  years.  The  banks  gener- 
ally adopted  the  policy  of  increasing  their  reserve  funds  by 
setting  aside  a  part  of  the  profits,  but  the  reserve  funds 
themselves  are  a  source  of  profit  in  the  revenue  derived  from 
the  securities  in  which  they  are  invested.  It  was  found, 
moreover,  by  some  of  the  English  joint  stock  banks  that  a 
better  class  of  shareholders,  of  undoubted  responsibility,  were 
attracted  by  the  limited  principle  where  men  of  straw  with- 
out other  visible  assets  had  begun  to  acquire  title  to  the 
stock  when  the  liability  was  unlimited.2 

The  three  senior  Scotch  banks  possessed  the  privilege  of 
limited  liability  in  respect  to  both  note  issues  and  general 
liabilities.  They  desired  in  1881  to  increase  their  capital  and 
to  issue  additional  stock  under  the  conditions  of  the  limited 
companies.8  The  bills  which  they  proposed  were  at  first 

1  42  and  43  Victoria,  c.,  76. 

2  London  Bankers'1  Magazine,  June,  1892,  LIU.,  897. 

3  The  chartered  banks  had  occasion  to  point  out,  in  the  course  of 


THE   SCOTCH  BANKING   SYSTEM.  !$/ 

favorably  received  in  Parliament,  but  after  passing  a  second 
reading  in  the  House  of  Lords  were  opposed  by  the  govern- 
ment. Conferences  and  correspondence  ensued  which 
brought  out  some  rather  startling  statements  as  to  the  policy 
of  the  government  towards  the  Scotch  note  issues.  Several 
of  the  objections  made  to  the  proposed  bills  were  completely 
demolished  by  the  representatives  of  the  banks,  and  the 
government  several  times  shifted  their  position.  The  gov- 
ernment at  first  objected  to  legislation  by  private  bill  and 
suggested  that  the  grant  of  new  privileges  in  recent  years  to 
corporations  had  been  accompanied  by  a  review  of  those 
already  possessed.  They  declared  they  were  determined  to 
oppose  the  grant  of  new  powers  if  the  three  banks  continued 
to  ask  for  them  accompanied  by  limited  liability  for  notes. 
The  banks  promptly  offered  to  cover  their  note  issue  by 
government  securities  to  the  amount  of  the  circulation 
authorized  by  the  Act  of  1845  and  by  coin  to  the  amount  of 
the  excess.  The  government  then  suddenly  forgot  their 
solicitude  for  the  security  of  the  circulation  and  intimated 
that  they  would  give  the  banks  a  lease  of  the  right  of  note 
issue  for  a  fixed  term,  subject  to  a  moderate  royalty. 

This  was  an  important  indication  of  public  policy,  for  it 
grew  out  of  the  theory  that  the  right  of  note  issue  was 
peculiarly  an  attribute  of  the  state.  It  was  based  upon  a 
measure  dealing  with  Knglish  banks  of  issue  which  had 
been  brought  before  Parliament  by  Lord  Palmerston  in  1865, 
but  never  became  law.  The  government  emphasized  their 
leaning  towards  state  note  issues  by  an  alternative  proposi- 
tion which  they  submitted, — that  the  banks  join  them  in 
considering  the  terms  upon  which  a  state  issue  of  notes, 
conducted  through  the  agency  of  all  the  banks,  and  main- 
taining the  £i  circulation,  might  be  introduced  into  Scot- 
land in  place  of  the  existing  circulation.  The  banks  replied 

the  discussion  which  followed,  that  there  were  legal  difficulties  which 
were  almost  insuperable  against  extending  unlimited  liability  for  ex- 
isting note  issues  to  their  shareholders,  but  they  expressed  their  will- 
ingness to  adopt  other  safeguards  for  the  ultimate  redemption  of  the 
notes.— Gilbart,  II. ,  414. 


158          HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

at  length,  declining  these  propositions.  They  did  not  care 
to  take  a  lease  of  rights  which  they  declared  were  already 
theirs  and  had  been  exercised  under  express  grants  from  the 
Crown  or  from  Parliament  for  from  135  years,  in  the  case  of 
the  youngest,  to  186  years  in  the  case  of  the  oldest  of  the 
three  banks.  A  state  issue  of  notes,  they  declared,  would 
not  be  acceptable  to  the  people  of  Scotland,  who  would 
suffer  more  than  the  banks  from  the  closing  of  many  of  the 
branches  and  the  diminution  of  banking  facilities  which 
would  be  the  necessary  consequence. 

The  right  of  the  Scotch  banks  to  maintain  their  branches 
in  Kngland  became  a  subject  of  active  controversy  in  1875, 
when  Mr.  Goschen  introduced  a  bill  in  the  House  of  Com- 
mons prohibiting  such  branches.  The  National  Bank  of 
Scotland  had  established  a  London  branch  in  1865  and  the 
Bank  of  Scotland  in  1872,  and  Mr.  Goschen  himself  had 
carried  through  a  bill  permitting  the  Royal  Bank  to  do  so  in 
1 873.  It  was  the  opening  by  the  Clydesdale  Bank  of  branches 
in  Northern  England  which  aroused  the  hostility  of  the  Eng- 
lish banks.1  Mr.  Goschen's  bill  resulted  in  a  commission, 
which  made  no  recommendations,  and  the  matter  was  dropped. 
A  new  attempt  was  made  to  drag  the  limitation  upon  Scotch 
banking  into  the  limited  liability  act  of  1879.  It  was  em- 
bodied in  the  eighth  section  of  the  original  government  bill 
and  prohibited  limited  companies  from  establishing  branches 
outside  that  part  of  the  Kingdom  in  which  they  had  their 
head  offices.  The  Scotch  banks  were  immediately  up  in 
arms  against  this  provision  and  the  government  were  finally 
persuaded  to  abandon  it.  They  attempted  a  flank  move- 
ment, by  cutting  down  the  operations  of  the  bill  to  the  joint 
stock  banks  of  England,  entirely  excluding  Scotland  and 
Ireland.  This  was  to  defeat  one  of  the  most  important  pur- 
poses of  the  bill  and  the  friends  of  the  Scotch  banks  declared 
that  they  would  not  permit  it  to  pass  in  such  a  form.  The 
government  were  finally  compelled  to  give  way  and  permit 
its  passage  in  a  form  applicable  to  the  entire  United  King- 


1  MacLeod,  Theory  and  Practice  of  Banking,  II,  397. 


THE   SCOTCH  BANKING  SYSTEM.  159 

dom  and  without  any  limitations  upon  the  power  of  the 
Scotch  banks  to  establish  their  branches  in  L,ondon. 

The  essential  features  of  the  Scotch  system  of  banking 
have  been  freedom  of  note  issues,  the  use  of  small  notes,  and 
cash  credits.  The  great  achievements  of  the  system  with 
these  elements  may  be  summed  up  thus  : 

1.  It  has  provided  Scotland   with   an   elastic  currency, 
adapted  to  the  condition  of  her  industries  and  adequate  in 
volume  to  their  changing  needs. 

2.  It  has  enabled  the  people  to  carry  on  numerous  com- 
mercial and  agricultural  transactions  for  which  they  could 
not  have  found  the  necessary  quantity  of  coin  and  has  econo- 
mized the  locking  up  of  capital  in  the  precious  metals. 

3.  It  has  made  the  use  of  notes  of  small  denominations 
familiar  and  popular  and  has  taught  the  people  the  distinc- 
tion between  bank-notes  as  the  representatives  of  credit  and 
the  precious  metals  as  the  measures  of  value. 

4.  It  has  brought  into  active  use  the  available  savings  and 
capital  of  the  country. 

5.  It  has  afforded  an  opportunity  for  entering  upon  busi- 
ness to  thousands  of  poor  but  honest  men  and  enabled  them 
to  lay  the  foundation  of  a  comfortable  home  and  in  many 
cases  of  a  fortune. 

6.  It  has  convinced  the  people  so  conclusively  of  the  value 
and  safety  of  the  banking  currency  system  that  no  serious 
panic  has  ever  lasted  beyond  a  few  days  or  has  ever  affected 
any  of  the  banks  except  those  which  were  justly  the  subject 
of  distrust. 

I.  The  first  proposition,  that  the  Scotch  banking  system 
has  provided  the  country  with  an  elastic  and  adequate  cur- 
rency, is  strictly  applicable  only  to  the  period  between  1765, 
when  payment  of  notes  on  demand  was  made  obligatory  by 
law,  and  1845,  when  the  volume  of  authorized  circulation 
was  arbitrarily  limited.  The  limitation  imposed  in  1845 
could  not  be  seriously  objected  to  at  that  time,  because  it  left 
the  authorized  circulation  at  the  amount  then  existing.  The 
moderate  demands  of  changing  seasons  for  an  increased  vol- 
ume of  circulation  could  easily  be  met  by  issues  of  notes 


l6o          HISTORY  OF  MODERN  BANKS  OF  ISSUE, 

against  coin,  since  it  would  be  highly  improbable  and  impru- 
dent that  any  bank  should  be  without  a  small  supply  of  coin 
which  might  be  made  available  for  such  a  purpose.  This 
view  of  the  matter  is  based,  however,  upon  the  theory  that 
the  population  and  trade  of  Scotland  were  to  remain  station- 
ary or  to  decline,  as  actually  happened  to  the  population  of 
Ireland.  An  advancing  population  and  volume  of  trade 
must  gradually  feel  the  fetters  cramping  the  flesh  of  com- 
merce and  this  has  been  to  some  extent  the  experience  of 
Scotland.  "  The  only  effect  of  this  law,"  upon  the  banks, 
according  to  M.  Courcelle-Seneuil,  "has  been  to  limit  their 
productive  power,  in  condemning  them  to  keep  in  reserve  a 
considerable  sum  without  necessit}^"  1  Protests  against  the 
operation  of  the  Act  of  1845  have  been  frequently  made  by 
the  Scotch  chambers  of  commerce  and  experience  has  seemed 
to  justify  the  early  criticism  of  Mr.  Gilbart,  "that  restric- 
tions upon  banks  are  taxes  upon  the  public. ' ' 2  But  Scot- 
land had  already  passed  the  point  in  1845  where  free  banking 
was  of  supreme  importance  to  her  industrial  development, 
limitations  upon  her  circulation  might  hamper  the  opera- 
tions and  reduce  the  profits  of  the  banks,  but  they  could  not 
unlearn  the  lessons  in  saving  and  in  the  use  of  banking 
facilities  which  had  been  taught  by  a  century  of  free  banking. 
The  Scotch  circulation  has  continued  to  fluctuate  in  some 
degree  according  to  the  seasons,  the  lowest  point  being 
reached  in  March  and  the  highest  in  November.  The  ad- 
vance, however,  is  not  steady  from  March  to  November,  but 
rises  to  a  high  point  in  May  and  then  falls  slightly  until  the 
advance  sets  in  which  culminates  in  the  autumn.  May  and 
November  are  the  months  when  the  interest  on  mortgages  is 
usually  settled,  annuities  are  paid,  the  country  people  take 
the  interest  on  their  deposits,  and  servants  receive  their 
wages.  It  was  the  custom  during  the  first  half  of  the  pres- 
ent century  to  settle  all  such  transactions  by  bank-notes. 
This  made  it  easier  for  the  banks  to  keep  their  accounts  than 
under  the  system  of  drawing  odd  amounts  in  checks  ;  for  a 

1  Traite  des  Operations  de  Banque,  298. 

2  History ',  Principles,  and  Practice  of  Banking^  II.,  182. 


THE   SCOTCH  BANKING  SYSTEM.  l6l 

depositor  having  payments  to  make  would  draw  out  the  en- 
tire sum  in  notes,  would  receive  his  payments  during  the  day 
in  the  same  form,  and  would  deposit  the  net  proceeds  again 
in  one  sum  in  notes  at  the  close  of  the  day.  The  use  of 
checks  has  now  become  more  general,  but  does  not  prevent 
the  rise  and  fall  of  the  circulation  in  the  autumn  and  spring 
as  formerly.1 

The  elasticity  and  security  of  the  Scotch  circulation  are 
assured  by  the  daily  exchange  of  notes  through  the  Edin- 
burgh clearing  house.  The  settlements  for  notes  were  un- 
dertaken at  an  early  date  by  the  Bank  of  Scotland  and 
the  Royal  Bank,  on  each  alternate  month  and  are  made  by 
exchange  drafts  on  I,ondon.  A  bank  which  cannot  meet 
the  test  of  these  settlements  is  driven  to  suspension,  as 
happened  to  the  Western  Bank  in  1857.  The  daily  ex- 
changes by  notes  are  the  great  regulator  of  the  paper  cur- 
rency and  by  their  means,  according  to  the  admission  of 
one  of  the  most  radical  opponents  of  free  banking,  ' '  the 
average  circulation  of  Scotch  bank-notes  is  reduced  to  a  term 
of  a  few  days. ' ' 2  Notes  which  are  not  demanded  by  the  con- 
venience of  trade  quickly  come  back  to  the  banks  as  deposits 
on  current  account  and  are  returned  through  the  exchanges 
to  the  issuing  bank  to  be  retired  and  cancelled. 

II.  The  proposition  that  the  banking  currency  of  Scotland 
has  enabled  her  people  to  carry  on  numerous  transactions 
for  which  they  could  not  well  have  found  the  necessary 
quantity  of  coin,  was  abundantly  demonstrated  by  the  testi- 
mony before  the  committees  of  Parliament  which  made  re- 
ports upon  the  subject  in  1826.  The  Act  of  1845  was  not 
successful,  according  to  Mr.  Gilbart,  "in  imparting  to  the 
people  of  Scotland  a  taste  for  gold."  The  circulation  of 
notes,  with  the  profit  which  the  banks  derived  from  circula- 
tion, was  necessary  to  maintain  the  existing  banking  system 
and  afford  accommodation  to  the  Scotch  people.  The  banks 
have  never  issued  the  gold  except  upon  demand  or  for  spe- 
cial purposes.  When  it  has  become  necessary  to  increase 

1  Gilbart,  II.,  178. 

2  Wolo\vski,  La  Banque  d'Angleterre,  etc.,  515. 


1 62          m STORY  Of  MODE  RAT  &ANKS  OF  ISSUE. 

the  circulation  beyond  the  limit  imposed  by  the  gold  in 
hand,  they  have  quietly  brought  the  gold  from  London  to 
Edinburgh  and  kept  it  locked  up  in  the  vaults  of  the  bank 
until  the  necessity  for  it  was  at  an  end.  The  amount  of 
gold  kept  in  the  Scotch  banks  prior  to  the  legislation  of 
1845  was  but  a  small  percentage  of  their  obligations,  but 
was  large  enough  to  maintain  their  solvency  and  supply  the 
yellow  metal  when  demanded  for  export  or  other  special 
uses.  The  specie  holdings  for  the  four  weeks  ending  Janu- 
ary 3,  1846,  just  after  the  act  took  effect,  were  only  ;£i,i8o,_ 
406,  or  less  than  half  a  pound  sterling  per  capita,  against  a 
circulation  of  ,£3, 336, 409.  The  specie  had  increased  for  the 
four  weeks  ending  March  5,  1864,  to  £2, 337,459  against  a 
circulation  of  .£3,996,743  ;  and  for  the  four  weeks  ending 
October  5,  1895,  to  /£5>52I>437  against  a  circulation  of 
,£7,054,197,  at  which  amount  it  has  substantially  remained. 

III.  The  use  of  small  notes  has  also  been  of  enormous 
advantage  to  the  people  of  Scotland,  and  has  produced  none 
of  the  dangerous  results  to  the  stability  of  the  currency 
which  have  sometimes  been  predicted  in  other  countries 
when  small  notes  have  been  proposed.  The  benefits  of 
issuing  notes  for  £i  were  fully  set  forth  in  the  testimony 
before  the  committees  of  the  two  houses  of  Parliament  in 
1826.  Mr.  Robert  Paul,  the  Secretary  to  the  Commercial 
Bank,  summed  up  some  of  the  evils  of  abolishing  small  notes 
by  declaring  that  it  would  require  the  reduction  of  the  num- 
ber of  branches,  because  of  the  increased  expense  in  the 
transmission  of  gold ;  the  withdrawal  of  cash  accounts,  be- 
cause they  would  no  longer  accomplish  the  end  for  which 
they  were  granted, — the  maintenance  of  the  small  note  cir- 
culation and  the  profits  derived  from  it  by  the  banks ;  and 
the  reduction  of  the  rate  of  interest  paid  on  deposits,  because 
it  would  be  necessary  to  keep  a  very  large  stock  of  gold  and 
to  keep  it  wholly  unproductive. 

A  letter  written  by  an  agent  of  the  Renfrewshire  Bank  at 
Greenock  to  the  manager,  Mr.  Roger  Aytoun,  set  forth  in 
an  even  more  striking  manner  the  absolute  paralysis  which 
would  fall  upon  many  transactions  by  the  adoption  of  a  gold 


THE   SCOTCH  BANKING  SYSTEM.  163 

currency  and  the  abolition  of  notes  under  ^5.  Cattle  dealers 
in  the  country  markets,  he  pointed  out,  often  purchased  two 
or  three  hundred  beasts,  reaching  an  aggregate  value  of 
several  hundred  pounds,  but  they  purchased  them  by  the 
single  animal,  at  a  price  ranging  from  £2  to  ^4,  from  the 
farmers  who  brought  them  to  market.  It  would  be  neces- 
sary, if  £i  notes  were  abolished,  for  them  to  come  to  market 
loaded  with  gold  and  silver,  and  the  difficulty  of  obtaining  it 
from  the  banks  would  be  increased  by  the  fact  that  the 
banks  derived  no  profit  from  its  circulation.  Grain  was 
bought  up,  it  was  pointed  out,  in  much  the  same  manner 
and  the  herring  fisheries,  which  often  amounted  at  L,ochfine 
alone  to  the  value  of  ^"40,000  in  a  single  season,  were 
brought  in  by  a  thousand  boats,  whose  catch  for  a  night  was 
generally  under  £5.  "If  small  notes  are  superseded,  and 
gold  substituted,"  continued  the  letter,  "it  is  not  easy  to 
see  how  the  supply  of  gold  is  to  be  kept  up  to  carry  on  the 
business  and  transactions  of  this  country.  Should  a  quan- 
tity of  it  be  received  into  the  circulation,  it  would  not  re- 
main long,  but  find  its  way  into  the  banks,  who  will  not 
again  give  it  out  in  bills  as  they  do  their  notes,  and  it  will 
immediately  become  a  scarce  article  in  the  country.  A  per- 
son, then,  having  to  pay  in  small  sums,  will  on  every  such 
occasion  be  obliged  to  send  his  large  notes  to  the  bank  that 
issued  them,  perhaps  a  hundred  miles  off,  to  receive  gold 
and  silver  in  their  place,  to  answer  his  purpose."  The  evi- 
dence was  so  overwhelming  of  the  value  of  the  small  note 
system  that  even  Sir  Robert  Peel  and  the  extreme  advocates 
of  the  currency  principle  were  convinced  of  the  serious  in- 
jury which  its  abolition  would  do  in  Scotland  and  both  the 
committees  of  the  I^ords  and  the  Commons  recommended 
the  postponement  of  the  measure. 

IV.  The  fourth  advantage  of  the  Scotch  currency  system, 
that  it  has  brought  into  active  use  the  available  savings  and 
capital  of  the  country,  is  due  to  the  system  of  allowing  inter- 
est on  deposits.  This  is  hardly  practicable  except  under 
freedom  of  note  issues,  because  no  other  system  would  afford 
the  banks  sufficient  profit  to  pay  a  rate  of  interest  attractive 


164          HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

to  capital.  The  early  regulations  permitted  deposits  for  any 
amount  above  /"TO,  subject  to  withdrawal  at  the  will  of  the 
depositor  and  bearing  interest  from  the  day  of  deposit  until 
the  day  of  withdrawal.  This  system  was  supplemented  by 
the  provident  banks,  which  received  deposits  of  small  sums 
until  they  amounted  to  ^10.  It  was  the  ambition  of  the 
Scotch  domestic,  fisherman,  and  agricultural  laborer  to  ac- 
cumulate enough  for  a  bank  deposit  during  a  half  year  or  a 
year  and  add  it  to  the  principal  and  interest  which  he  had 
already  earned.  When  this  sum  accumulated  sufficiently  to 
enable  the  depositor  to  buy  or  build  a  house,  or  to  set  up 
as  a  master  in  the  trade  in  which  he  had  been  a  servant,  it 
would  be  drawn  in  bank-notes,  which  would  continue  to  afford 
profit  to  the  bank  until  returned  by  some  other  depositor. 
The  system  thus  stimulated  greatly  the  frugality  and  savings 
of  the  poor,  and  did  much  to  accumulate  in  Scotland  a  capi- 
tal capable  of  developing  her  agriculture  and  manufactures.1 
It  has  not  been  merely  as  savings  banks,  however,  that 
the  Scotch  banks  have  contributed  to  bring  into  the  circle 
of  active  industry  the  entire  capital  of  the  country.  The 
wide  diffusion  of  branches  under  the  Scotch  banking  system 
places  a  bank  account  within  the  reach  of  every  small  trader. 
The  result,  in  connection  with  the  interest  allowed  on  de- 
posits, has  been  to  create  a  much  greater  number  of  deposit 
accounts  from  small  tradesmen  than  in  any  other  country. 
Th'e  facility  of  banking  and  the  advantage  of  earning  inter- 
est have  tempted  the  Scotch  tradesman  to  keep  his  spare  cash 
in  hand  at  the  lowest  minimum  and  to  deposit  his  entire  sur- 
plus in  the  bank.  The  payment  of  interest  thus  acts  as  a 
direct  check  upon  excessive  issues  by  bringing  the  notes 
back  to  the  bank  for  deposit.  The  advocates  of  the  Scotch 

1  The  proof  of  the  large  savings  of  the  Scotch  people  and  their  gen- 
eral use  of  banking  facilities  may  be  found  in  the  bank  returns  for  the 
United  Kingdom  for  1907  published  on  pp.  133-34,  .in  Chapter  V. 
These  returns  show  that,  in  spite  of  the  enormous  stealth  and  bank- 
ing business  concentrated  in  the  City  of  London,  the  deposit  liabilities 
of  the  Scotch  banks,  divided  by  the  population  e'f  Scotland,  show  a 
per-capita  average  of  about  ^"26,  while  those  of  England  subjected  to 
a  like  process  show  an  average  of  about 


THE  SCOTCH  BANKING  SYSTEM.  165 

banking  system  blame  the  English  banks  for  their  failure  to 
invite  the  available  capital  of  the  country  into  their  coffers 
by  the  payment  of  interest.1  If  a  Scotch  banker  issues  a 
quantity  of  notes,  he  feels  assured  that  nearly  all  of  them 
will  be  paid  into  some  bank  in  the  course  of  the  day.  There 
was  a  competition  among  issuers,  before  the  Act  of  1845, 
but  it  was  under  the  restraint  of  the  theoretical  rule  of  free 
banking,  that  the  notes  come  back  to  the  bank  whenever 
they  are  issued  in  excess.  Many  of  the  English  banks, 
however,  have  discouraged  deposits  and  active  accounts  by 
charging  a  commission  when  the  accounts  were  operated 
upon. 

Deposit  accounts  and  the  payment  of  interest  have  thus 
operated  at  once  to  bring  within  the  circle  of  productive  in- 
dustry every  possible  fraction  of  available  capital,  but  they 
have  operated  also  to  apply  constantly  to  the  banks  the 
touchstone  of  a  sound  and  scientific  currency, — the  redemp- 
tion and  cancellation  of  their  notes.  These  results  could  not 
be  accomplished  without  the  wide  diffusion  of  branches. 
In  spite  of  amalgamations,  which  dispensed  with  many  old 
branches,  the  total  number  of  offices  increased  from  812  in 
1872  to  1256  in  1913,  or  an  office  to  3790  inhabitants.  The 
methods  by  which  they  have  accomplished  such  results, 
moreover,  are  not,  in  the  language  of  M.  Courcelle-Seneuil, 
' '  the  exercise  of  a  blind  routine,  the  setting  in  motion  of  a 
sort  of  mechanism  ;  they  have  been  the  employment  of  an 
enlightened  judgment  in  their  loans,  the  exercise  of  a  high 
intelligence  applied  to  business."  The  Scotch  system  of 
branches  results  in  an  even  distribution  of  capital  by  with- 
drawing it  from  points  where  it  is  not  needed  and  concentrat- 
ing it  where  it  is  needed.  The  branches  in  the  agricultural 
districts  usually  accumulate  more  capital  than  is  needed 
within  their  own  circuits  and  transfer  it  to  the  manufactur- 
ing districts,  which  are  able  to  employ  nearly  all  the  capital 
they  can  obtain.  This  system  kept  capital  within  the  coun- 
try and  the  payment  of  interest  on  deposits  contributed  to 
deter  the  Scotch  people  from  the  reckless  investments  which 

1  Gilbart,  II.,  201. 


1 66          HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

have  absorbed  so  many  millions  of  English,  French,  and 
American  money. 

It  was  predicted,  when  the  regulation  of  note  issues  was 
applied  to  the  Scotch  banks  in  1845,  that  the  result  would  be 
the  reduction  of  the  interest  paid  on  deposits,  and  this  pre- 
diction has  been  verified  by  events.  A  part  of  this  reduction 
has  undoubtedly  been  due  to  the  accumulation  of  capital 
and  the  fall  in  its  price  in  the  money  markets  of  the  world, 
but  a  part  is  due  to  the  increased  cost  of  banking  under  the 
Act  of  1845.  A  radical  departure  was  taken  from  the  old 
methods  of  Scotch  banking,  when  the  banks  by  a  circular  of 
October  i,  1892,  gave  notice  that  after  that  date  the  allowance 
of  interest  on  creditor  balances  of  current  accounts  would  be 
discontinued.1  No  distinction  was  made  in  regard  to  the 
rate  of  interest,  at  the  time  of  the  Act  of  1845  and  for  some 
years  after,  between  deposit  accounts  and  credit  balances  of 
current  accounts.  The  rate  allowed  was  the  same  on  the  two 
classes  of  accounts  and  seldom  fell  so  low  as  two  per  cent. 
The  rate  in  force  on  deposits  for  several  years  was  one  and  a 
half  per  cent,  and  this  was  reduced  in  January,  1895,  to  one 
per  cent.  These  low  rates  have  destroyed  much  of  the 
motive  for  depositing  idle  capital  in  the  banks,  and  have 
driven  the  Scotch  people  to  send  their  money  to  Australia 
and  seek  other  and  less  secure  investments  than  those  which 
they  formerly  obtained  at  home  by  simply  depositing  their 
surplus  in  their  current  accounts  with  the  banks. 

V.  The  fifth  great  advantage  of  the  Scotch  banking  sys- 
tem, that  it  has  afforded  an  opportunity  for  entering  upon 
business  to  thousands  of  poor  but  honest  young  men,  is  due 
chiefly  to  the  system  of  cash  credits.  The  Royal  Bank 
found,  soon  after  its  organization,  that  it  had  more  capital 
than  it  could  employ  in  ordinary  commercial  operations  on 
bills  of  exchange  within  the  narrow  circle  of  Scotch  com- 
merce. The  result  was  the  adoption  of  the  system  of  cash 
credits  for  the  promotion  of  agriculture  and  industry.  The 
system  consists  in  giving  an  open  credit,  or  drawing  account, 
to  a  customer  who  is  vouched  for  by  two  or  more  trustworthy 

1  London  Bankers'  Magazine,  April,  1893,  LV.,  577. 


THE   SCOTCH  BANKING  SYSTEM.  1 67 

persons.  A  cash  credit  of  ^100  authorizes  the  person  in 
whose  favor  it  is  granted  to  draw  upon  the  bank  for  that 
amount,  but  he  is  not  usually  expected  to  draw  the  entire 
sum  at  once  and  is  charged  with  interest  only  on  the  amount 
actually  drawn  and  not  repaid  at  any  given  time.  The  sys- 
tem differs,  therefore,  from  the  discounting  of  a  bill  of  ex- 
change in  the  fact  that  the  money  can  be  drawn  piece-meal 
instead  of  in  bulk  and  interest  is  charged  only  upon  the  por- 
tion of  the  loan  actually  outstanding.  If  payments  are  made 
from  time  to  time  into  the  bank,  they  are  credited  and  the 
interest  charged  is  reduced.  The  persons  who  vouch  for  the 
holder  of  the  cash  credit  are  called  cautioners  or  sureties. 

A  cash  credit,  therefore,  is  in  the  nature  of  permission  to 
overdraw  an  account  up  to  a  fixed  limit.  Cash  credits  are 
rarely  given  for  sums  below  ;£ioo  and  generally  range  from 
^200  to  ^"500.  The  banks  prefer  these  small  sums,  but 
sometimes  grant  such  credits  for  ^1000  or  even  larger  sums. 
Payments  upon  these  credits  are  made  in  the  notes  of  the 
bank,  which  are  thus  kept  in  active  circulation.  Such  a 
credit  is  not  allowed  to  lapse  into  a  dead  loan  of  the  aggre- 
gate amount,  but  it  is  expected  that  payments  will  inter- 
mingle with  drafts  upon  it.  It  is  intended  as  a  working 
capital  for  men  of  good  character  engaged  in  trade  or  agri- 
culture. It  has  the  advantage  over  the  ordinary  method  of 
loans  by  discount,  not  only  that  it  is  more  economical  to  the 
borrower,  but  that  it  keeps  within  the  control  of  the  bank 
all  sums  not  in  active  business  use.  The  holder  of  a  cash 
credit  is  not  only  benefited  by  paying  into  his  account  all  the 
cash  which  he  may  receive  from  day  to  day,  but  he  reduces 
the  bank's  outstanding  loans  by  that  amount  and  enables  it 
to  increase  them  in  other  directions. 

The  advantage  of  this  system  to  Scotch  industry  has  been 
incalculable,  measured  not  only  in  shillings  and  pounds  to 
the  borrower,  but  in  the  stimulus  which  it  has  given  to  the 
thrift,  frugality,  honesty,  and  morality  of  the  people.  The 
two  cautioners  keep  an  eye  upon  the  young  man  for  whom 
they  have  vouched,  have  a  right  to  know  the  state  of  his  ac- 
counts, and  if  they  find  that  his  business  is  badly  conducted, 


1 68  HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

they  can  withdraw  their  security  and  authorize  the  bank  to 
call  in  the  loan.  The  losses  on  cash  credits  have  been  tri- 
fling throughout  the  entire  history  of  Scotch  banking.  Cash 
credits  have  been  granted  to  manufacturers  and  large  employ- 
ers and  to  the  trustees  of  great  public  works,  as  well  as  to 
young  men  setting  up  in  business  and  to  farmers  desiring 
money  in  anticipation  of  the  sale  of  their  crops.  Many  dis- 
tinguished Scotch  manufacturers  have  testified  that  the  sys- 
tem of  cash  credits  was  the  foundation  of  their  success  in 
life.  Mr.  Monteith,  a  member  of  Parliament  who  testified 
before  the  Committee  of  the  House  of  Commons  in  1826,  de- 
clared that  he  was  then  a  manufacturer  employing  4000 
hands  and  that,  except  for  the  merest  trifle  of  capital  which 
was  lent  to  him,  and  which  he  soon  paid  off,  he  began  the 
world  with  nothing  but  a  cash  credit.  The  testimony  before 
the  same  committee  showed  that  upon  one  cash  credit  of 
^"500  there  were  operations  to  the  amount  of  ,£70,000  in  a 
single  year,  and  one  witness  stated  that  during  twenty-one 
years  in  a  country  bank  of  moderate  size  operations  took 
place  to  the  amount  of  ^90,000,000  and  that  there  had  been 
but  one  loss  of  ,£200  on  a  single  account  and  that  the  whole 
loss  of  the  bank  during  the  entire  period  did  not  exceed 

;£l200.1 

VI.  The  confidence  which  has  been  produced  among 
the  Scotch  people  in  the  system  of  a  banking  currency  as 
maintained  by  their  banks  was  illustrated  in  a  remarkable 
manner  at  the  time  of  the  failures  of  the  Western  Bank  in 
1857  and  the  City  of  Glasgow  Bank  in  1878.  The  run  upon 
the  Western  Bank  began  on  Tuesday,  October  13,  1857,  an(^ 
continued  for  three  days,  but  during  that  entire  period  the 
bank  paid  away  only  about  ^36,000,  in  coin,  and  for  the 
entire  month  from  October  loth  to  November  7th  only 
,£44,000.  Deposits  were  drawn  out  to  the  amount  of 
;£i,  280,000,  but  in  nearly  every  case  the  depositors  were 
willing  to  accept  the  notes  of  the  bank  and  when  it 
suspended  operations  the  notes  in  circulation  were  still 
^7 20, ooo.  The  heaviest  pressure  upon  the  bank  came  after 

1  MacLeod,  Theory  and  Pratice  of  Banking,  I.,  347. 


THE  SCOTCH  BANKING  SYSTEM.  169 

the  announcement  that  it  would  receive  support  from  the 
other  Edinburgh  banks  on  condition  of  winding  up.  This 
pressure  came,  not  from  any  demand  for  gold,  but  from 
large  tradesmen  who  transferred  their  accounts  to  other 
banks  in  order  to  establish  banking  relations  for  the  future. ' 
The  bank  was  unable  to  settle  the  heavy  exchanges  which 
were  thus  created  against  it  in  the  settlement  with  the 
associated  banks. 

It  was  not  until  Sunday,  November  8th,  that  the  other 
banks  resolved  to  refuse  the  notes  of  the  Western  Bank  in 
consequence  of  its  inability  to  settle  its  exchanges,  and  the  de- 
mand for  gold  became  more  marked  on  Monday  and  Tuesday. 
The  Western  Bank  closed  on  Monday  and  a  genuine  panic 
was  directed  for  a  day  and  a  half  against  the  City  of  Glasgow 
Bank,  because  it  had  been  guilty  of  the  same  negligence  as 
the  Western  Bank  regarding  the  keeping  of  its  reserve  in 
lyondon.  The  bank  was  obliged  to  close  on  Wednesday, 
but  the  demand  for  gold  was  almost  entirely  confined  to 
depositors  and  very  few  note-holders  came  forward  to 
demand  payment  of  their  notes.  L,arge  remittances  of  gold 
arrived  from  L,ondon  on  Wednesday  and  Thursday,  the  run 
on  the  banks  ended  on  Wednesday  afternoon,  and  the  people 
seemed  to  retain  the  same  confidence  as  ever  in  the  other 
banks  and  received  the  notes  even  of  the  Western  Bank  when 
the  other  banks  agreed  to  again  receive  them.  When  the 
City  of  Glasgow  Bank  failed  in  1878,  it  was  only  necessary 
for  the  other  banks  to  announce  that  they  would  continue 
to  receive  its  notes,  as  usual,  to  put  an  end  to  all  uneasiness 
on  the  score  of  the  notes.  If  the  banks  on  these  occasions 
had  not  been  allowed  to  issue  notes,  the  entire  demand  for 


1  The  same  tendency  to  substitute  the  note  obligations  of  the  bank 
for  a  deposit  account  was  shown  in  British  North  America  after  the 
failure  of  the  Commercial  Bank  of  Manitoba  on  July  3,  1893.  The 
reason  in  this  case  for  preferring  notes  was  the  fact  that  they  were 
made  by  the  Canadian  banking  act  of  1890  a  perfectly  secured  first 
lien  upon  the  assets.  The  banks  receiving  these  notes  were  willing 
to  hold  them  for  a  time,  at  the  request  of  the  liquidator,  because  they 
bore  six  per  cent  interest  until  paid. — Breckenridge,  394-95. 


I7O  HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

the  withdrawal  of  deposits  must  have  been  met  in  coin  and 
would  have  put  a  heavy  pressure  upon  the  coin  reserves. 
But  the  small  notes  were  readily  received,  the  deposit  ac- 
counts of  the  solvent  banks  were  not  assailed  and  the  Scotch 
banking  system  retained  as  completely  as  ever  the  confidence 
of  the  people. 

The  history  of  Scotch  banking  has  been  comparatively 
uneventful  in  recent  years.  The  reduction  of  the  interest 
paid  on  deposits  and  the  investment  of  a  large  share  of 
Scotch  banking  assets  in  L,ondon  tended  to  prevent  the 
rapid  growth  of  resources  and  to  assimilate  the  operations 
of  the  Scotch  banks  to  those  of  other  British  joint-stock 
banks.  The  crisis  of  1907,  however,  enabled  the  banks  to 
increase  their  rate  of  interest  on  deposits  temporarily  to  four 
per  cent.,  which  drew  back  some  depositors.1  The  depre- 
ciation of  consols,  which  caused  losses  to  nearly  all  British 
banks,  was  responsible  in  part  for  the  first  banking  amal- 
gamation in  Scotland  since  1868.  This  was  the  absorption 
in  1907  by  the  Bank  of  Scotland  of  the  Caledonian  Bank. 
The  latter,  the  smallest  of  the  surviving  Scotch  banks  of 
issue,  with  deposits  of  about  ,£1,350,000,  had  been  since 
1878  working  in  harmony  with  the  larger  institution,  but 
had  not  been  conspicuously  successful.  The  merger  made 
the  total  assets  of  the  Bank  of  Scotland  at  the  close  of  1907 
£2 1, 955, 629,  and  put  it  at  the  head  of  all  Scotch  banks  in 
magnitude  of  resources.  The  Bank  of  Scotland  added  the 
authorized  note  issue  of  the  Caledonian  Bank,  which  was 
;£53>434>  to  its  own  previous  issue  of  ^343, 418. 2  Another 
merger,  in  March,  1908,  absorbed  the  Town  and  County 
Bank  into  the  North  of  Scotland  Bank,  and  reduced  the 
number  of  banks  in  Scotland  to  eight.  The  authorized  issue 
of  the  Town  and  County  Bank  was  ^70,133,  and  its  assets 
on  January  i,  1908,  were  ^3, 905, 256." 

1  London  Bankers'  Magazine,  February,  1908,  LXXXV.,  230. 
9  Ibid.,  August,  1907,  IvXXXIV.,  170-72. 
» Ibid.,  April,  1908,  LXXXV.,  634. 


CHAPTER  VII. 

BANKING  IN  IRELAND. 

The  Effect  of  Political  atid  Economic  Misfortunes— The  Early  Bankers 
and  the  Foundation  of  the  Bank  of  Ireland— The  Provincial  Bank 
and  Other  Banks  of  Issue — The  Collapse  of  the  Agricultural  and 
Tipperary  Banks— The  Act  of  1845  and  Present  Conditions. 

T  RElfAND  has  had  almost  as  varied  an  experience  in 
banking  as  in  the  political  fortunes  of  her  people  and 
her  banking  history  has  been  affected  more  or  less 
unfavorably  by  the  agitated  condition  of  the  country.  The 
policy  of  England  towards  Ireland  was  distinctly  selfish 
during  the  seventeenth  and  eighteenth  centuries.  Irish 
agriculture  was  crushed  by  the  importation  of  bounty-paid 
wheat  from  England  and  Irish  manufactures  were  stifled  by 
countervailing  duties  intended  to  prevent  their  competition 
with  English  goods.1  The  linen  trade  was  almost  the  only 
one  wrhich  was  allowed  some  degree  of  prosperity,  upon 
the  theory  that  it  was  better  for  England  to  draw  her 
linen  supply  from  a  dependency  than  to  pay  foreign  coun- 
tries for  it.  This  policy  was  changed  from  1782  to  1800, 
while  Ireland  had  an  independent  parliament,  for  the  policy 
of  large  bounties  and  protective  duties,  and  for  a  brief  period 
Irish  industry  started  forward  by  leaps  and  bounds  under 
this  artificial  stimulus.  But  the  country  soon  felt  the  heavy 
cost  of  the  bounty  system  and  prosperity  began  to  decline 
before  the  union  with  Great  Britain.  The  economic  history 
of  Ireland  then  became  a  part  of  that  of  England,  and  a 
reasonable  degree  of  progress  was  made  up  to  the  time  of 
1  Cunningham,  II.,  298,523. 


1/2  HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

the  potato  famine  in  1846.  That  event  caused  a  loss  of  pop- 
ulation by  starvation  and  immigration  which  has  never  been 
recovered.  Absentee  landlordism  also  has  been  a  permanent 
source  of  loss  to  the  country  by  the  large  amount  of  produce 
and  money  annually  sent  abroad  in  payment  for  rents.  The 
fact  that  bank  deposits  have  increased  and  that  Ireland  has 
retained  within  her  limits  a  large  fund  of  gold  and  silver, 
in  spite  of  these  obstacles  to  her  progress,  is  high  evidence 
of  the  productive  and  thrifty  character  of  the  Irish  people 
and  the  sound  judgment  of  their  bankers. 

The  earliest  banking  in  Ireland  seems  to  have  been  done 
by  brokers  or  intermediaries,  who  brought  borrowers  and 
lenders  together  for  a  consideration.  The  business  of  issuing 
promissory  notes  against  deposits  of  coin  gradually  grew  up 
among  the  goldsmiths  and  tradesmen,  who  carried  it  on  in 
addition  to  their  regular  callings.  These  notes  were  given 
a  legal  status  as  negotiable  instruments  by  an  Act  of  1709, 
which  made  them  assignable  and  transferable  by  endorsement. 
There  were  no  banking  laws  to  prevent  fraud  and  failure, 
and  the  losses  by  the  failure  of  banks  or  exchangers  was 
estimated  as  early  as  1682  at  having  been  ,£50,000  within  a 
few  years.1  The  Act  of  1709  gave  the  power  to  protest  in- 
land as  well  as  foreign  bills  and  promissory  notes  for  non- 
acceptance  or  non-payment.  The  Irish  House  of  Commons 
acted  as  a  court  of  bankruptcy  and  a  special  act  of  Parlia- 
ment was  necessary  for  the  liquidation  of  the  affairs  of  an 
insolvent  institution.  The  first  act  of  the  kind  on  record  is 
in  1721,  which  was  passed  for  the  relief  of  the  creditors  of 
Mead  and  Curtis,  a  Dublin  firm  which  had  suspended  on 
June  14,  1727.  A  bill  for  the  relief  of  Burton  and  Falkiner 
of  Dublin  was  passed  in  1733  but  the  final  legislation  re- 
garding the  affairs  of  this  firm  was  not  passed  until  1757. 
The  firm  had  acted  as  bankers  for  the  government  and  their 
failure  seems  to  have  been  due  to  their  large  holdings  of 
landed  property,  which  could  not  be  turned  into  cash  when 
needed. 

A  series  of  failures  took  place  in  1755  and  1756,  which  led 

Dillon,  17. 


BANKING  IN  IRELAND.  173 

to  the  appointment  of  a  select  committee  of  the  House  of 
Commons  to  make  an  inquiry.  They  reported  that  credit 
had  suffered  by  the  setting  up  of  persons  as  bankers  with- 
out sufficient  capital,  and  recommended  that  bankers  be 
required  to  register  the  real  and  personal  estate  which  they 
proposed  to  hold  as  security  for  the  payment  of  their  liabili- 
ties, that  the  names  of  the  issuing  bankers  be  stated  on  bank- 
notes, that  bankers  should  not  be  permitted  to  trade  as 
merchants,  and  that  it  should  be  made  a  felony  without 
benefit  of  clergy  for  cashiers  or  clerks  to  embezzle  money 
in  excess  of  ^50.  The  committee  also  recommended  the 
cancellation  of  notes  at  the  time  of  payment.  These  recom- 
mendations, except  that  regarding  the  registration  of  security, 
were  embodied  into  law  in  1755  (29  George  II.,  c.  16).  This 
act  did  not  entirely  revive  credit  and  four  important  banking 
failures  took  place  in  1758  and  in  1760.  The  first  was  that  of 
Clements,  Malone,  and  Gore,  a  firm  established  on  July  3, 
J758,  which  closed  its  doors  on  November  ist,  of  the  same 
year.  This  firm  issued  deposit  notes  payable  to  bearer  on 
seven  days'  notice  with  interest  at  the  rate  of  ten  pence  per 
week  for  every  ^100  (two  and  one-sixth  per  cent,  per  annum). 
The  deposits  obtained  were  larger  than  were  expected  and 
were  invested  largely  in  land,  but  the  depositors  soon  began 
to  demand  repayment  of  their  notes  and  as  cash  could  not 
be  obtained  the  firm  was  obliged  to  suspend.  l 

Three  of  the  six  large  banking  firms  in  Dublin  suspended 
in  1760  and  the  others  refused  to  discount  bills  and  practi- 
cally suspended  business.  Among  the  firms  which  remained 
solvent  was  that  of  Messrs.  L,a  Touche  and  Co. ,  which  began 
business  in  1725  and  survived  as  a  banking  house  until  its 
fusion  with  the  Munster  Bank  in  1878.  The  financial  con- 
dition of  the  country  and  the  state  of  credit  were  in  such  a 
situation  that  a  meeting  of  the  merchants  of  Dublin  was 
held  in  April,  1760,  which  made  an  appeal  to  Parliament  for 
relief.  A  committee  of  inquiry  was  named  by  the  House 
which  reported  on  April  23,  1760,  that  the  quantity  of  paper 
in  circulation  was  insufficient  to  carry  on  trade  and  manufac- 

1  Dillon,  23. 


1/4         HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

tures,  and  recommended  support  for  the  three  surviving 
banks  to  the  amount  of  ,£50,000  each.  This  recommenda- 
tion was  adopted  and  the  notes  of  these  bankers  were 
received  as  cash  in  the  subscription  for  a  loan  which  was 
then  being  raised.  The  failure  of  Sir  George  Colebrook, 
Bart.,  and  Company,  London  bankers  who  had  opened  a 
branch  in  Dublin,  in  1764,  was  the  cause  of  another  panic 
in  1770  which  led  the  L,ord  lieutenant  and  some  of  the 
gentry  to  issue  a  notice  pledging  themselves  to  receive  the 
notes  of  the  existing  Dublin  bankers  without  question. 

The  effort  to  found  a  strong  joint  stock  bank  began  the 
year  after  the  foundation  of  the  Bank  of  Bngland.  A  number 
of  the  principal  merchants  of  Dublin  held  a  meeting  in  1695 
and  presented  a  memorial  to  the  Irish  House  of  Commons 
on  September  i7th,  recommending  the  establishment  "  of  a 
public  bank  or  a  fund  of  credit,  for  the  encouragement  of 
trade,  and  supply  of  the  present  want  of  money."  The 
petition  was  referred  to  the  committee  on  trade,  but  was 
never  reported  upon.  The  matter  was  revived  in  1720  by 
L,ord  Abercorn,  L,ord  Boyne,  and  others,  who  petitioned  the 
King  for  authority  to  found  a  public  bank  with  a  capital  of 
,£500,000.  The  L,ords  Justices  reported  in  favor  of  the 
scheme  and  the  King  authorized  the  Lord  Lieutenant  to 
grant  a  commission  and  charter.  The  consent  of  the  House 
of  Commons  was  required  for  a  proper  bill  and  the  early 
stages  were  favorably  passed.  Charges  of  jobbery  began 
to  be  made  against  the  promoters  of  the  bank,  a  rival  scheme 
was  started  with  a  capital  of  ,£1,000,000,  whose  promoters 
were  charged  with  paying  ,£50,000  to  members  of  the  House 
as  bribes,  and  the  outcome  was  the  passage  of  a  resolution 
on  December  9,  1721,  "  That  the  erecting  or  establishing  a 
public  bank  in  this  Kingdom  will  be  of  the  most  dangerous 
and  fatal  consequence  to  his  Majesty's  service  and  the  trade 
and  liberties  of  this  nation."  Religious,  political,  and  finan- 
cial reasons  influenced  the  action  of  the  House,  but  a  stronger 
reason  was  probably  found  in  the  infringement  of  the  privilege 
of  originating  legislation,  which  they  jealously  guarded. 

The  plan  of  a  public  bank  remained  in  abeyance  until 


BANKING  IN  IRELAND.  175 

1782,  when  Ireland  obtained  a  new  constitution,  was  freed 
from  humiliating  tariff  restrictions  and  believed  herself  upon 
the  threshold  of  a  new  era  of  prosperity.  Mr.  Eden,  the 
Secretary  to  the  Lord  Lieutenant,  presented  the  heads  of  a 
bill  for  a  bank  on  February  27,  1782.  Some  opposition 
developed  among  the  existing  bankers  and  their  friends  in  the 
House  and  when  Mr.  Eden  called  the  bill  up  on  March  5th, 
the  opponents  of  the  bank  endeavored  to  secure  an  adjourn- 
ment, but  the  motion  was  lost  and  the  report  of  the  com- 
mittee was  agreed  to.  The  capital  of  the  bank  was  fixed  at 
600,000  Irish  pounds,1  of  which  no  person  was  to  subscribe 
more  than  ,£10,000,  and  which  was  to  be  lent  to  the  govern- 
ment at  four  per  cent.  The  charter  was  to  run  until  January 
i,  1794,  and  until  twelve  months'  notice  of  withdrawal  and 
the  re-payment  of  all  sums  due  the  bank  by  the  government. 
The  bank  began  business  June  23,  1783,  and  as  early  as 
October  3ist,  of  the  same  year  Mr.  David  La  Touche,  Jr., 
was  able  to  inform  the  House  of  Commons  that  great  advan- 
tages had  resulted,  particularly  to  the  traders  in  linen.  The 
first  offices  of  the  bank  were  in  some  old  houses  in  Mary's 
Abbey,  but  after  the  union  of  Great  Britain  and  Ireland  in 
1802,  the  directors  of  the  bank  purchased  the  Parliament 
house  for  ,£40,000.  They  remodelled  it  to  meet  their  require- 
ments and  established  the  bank  there  in  1808.  The  meet- 
ings of  the  directors  and  shareholders  are  held  in  the  old 
chamber  of  the  Lords  and  the  general  office  occupies  the 
old  House  of  Commons. 

The  new  institution  was  known,  in  similar  language  to 
that  establishing  the  Bank  of  England,  as  ' '  The  Governor 
and  Company  of  the  Bank  of  Ireland, ' '  and  was  not  allowed 

1  The  coinage  of  Ireland,  although  bearing  the  same  names,  differed 
from  that  of  Great  Britain.  The  English  shilling  was  passed  in  Ire- 
land for  thirteen  pence,  although  twelve  Irish  pence  were  equal  to  a 
shilling  and  twenty  shillings  to  a  pound.  This  made  English  coins 
worth  about  eight  per  cent,  more  than  Irish  coins  of  the  same  names 
and  led  to  much  confusion  until  the  currencies  were  assimilated  by 
the  Act  of  6  George  IV.,  c.  79,  making  the  currency  of  Great  Britain 
that  of  the  United  Kingdom  and  providing  for  the  interpretation  of 
contracts  in  its  terms. 


HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

to  charge  more  than  five  per  cent,  interest  on  loans  and  dis- 
counts. If  the  bank  incurred  debts  to  a  greater  amount 
than  its  capital,  the  subscribers  were  answerable  in  their 
private  capacity  to  the  creditors  in  proportion  to  their  sub- 
scriptions. The  stock  was  to  be  transferable  and  to  be 
deemed  personal  estate,  and  as  such  to  go  to  the  executors 
of  the  holders  rather  than  their  heirs.  Fifteen  directors  were 
to  be  chosen  annually,  not  more  than  two-thirds  of  the  direc- 
tors of  the  preceding  year  were  to  be  re-elected,  and  the 
corporation  was  to  have  a  governor  and  a  deputy  governor. 
The  charter  of  the  bank  was  renewed  in  1791  and  the  capital 
increased  to  ,£1,000,000.  Another  increase  of  ,£500,000  was 
made  in  1791,  and  still  another  increase  of  ,£1,000,000  was 
made  in  1808  by  48  George  III.,  c.  103.  The  charter  was 
extended  at  this  time  until  the  expiration  of  twelve  months' 
notice  after  January,  1837.  The  last  increase  of  capital 
was  made  in  1820,  when  the  total  was  fixed  at  ,£3, 000,000 
in  Irish  currency  (equivalent  to  ,£2,769,231  in  English  cur- 
rency). This  last  increase  was  taken  from  the  surplus  fund 
of  the  bank  and  lent  to  the  government,  making  the  aggre- 
gate loans  to  this  date  ,£2,630,769  in  English  currency.  The 
total  annuity  paid  the  bank  by  the  government  was  fixed  at 
^115,384,  which  was  reduced  in  1845  to  .£92,076,  or  at  the 
rate  of  three  and  a  half  per  cent,  on  the  English  equivalent 
of  the  amount  of  the  loan,  and  was  further  slightly  reduced 
in  1892. 

The  suspension  of  cash  payments  in  England  in  1797  was 
extended  to  Ireland,  without  any  apparent  necessity,  "  for 
the  sake  of  uniformity."  Exchange  was  then  in  favor  of 
Ireland,  there  was  no  special  demand  upon  the  Bank  of 
Ireland  and  no  drain  of  gold  was  feared.  The  effect  of  sus- 
pension, however,  was  to  enormously  stimulate  the  issue  of 
notes,  which  increased  from  ^621, 917  in  1797  to  £2, 482, 162 
in  1800,  ,£3,068, TOO  in  1809,  ,£4,212, 600  in  1813,  and  finally 
reached  ,£5,182,600  in  1821  and  ^6,309,300  in  1825.  Ex- 
change turned  against  Ireland  as  early  as  1804  and  led  to 
the  special  inquiry  by  the  British  Parliament  which  resulted 
in  the  formulation  of  the  principles  afterwards  repeated  with 


BANKING  IN  IRELAND.  1 77 

greater  elaboration  in  the  Bullion  Report.  The  evidence 
showed  that  silver  had  disappeared  from  circulation,  even 
for  subsidiary  purposes,  and  been  replaced  by  silver  notes. 
Mr.  Colville,  a  director  of  the  Bank  of  Ireland,  testified  that 
there  were  in  Ireland  seven  bankers  issuing  notes  ;  28  issuers 
of  gold  and  silver  notes,  62  issuers  of  silver  notes  ;  and  128 
issuers  of  I.  O.  U's.  l  The  Bank  of  Ireland  made  large 
profits  upon  its  forced  circulation,  and  paid  dividends  never 
less  than  six  and  a  half  per  cent,  and  rising  in  1803  and 
1805,  including  a  bonus,  to  twelve  and  a  half  per  cent.  Ex- 
change on  L,ondon  became  favorable  after  a  time,  not  because 
the  value  of  Irish  currency  was  raised,  but  because  that  of 
England  had  fallen  to  its  level. 

The  substantial  monopoly  of  joint  stock  banking  by  means 
of  note  issues  was  conferred  upon  the  Bank  of  Ireland  by 
the  act  of  incorporation,  which  declared  that  it  should  ' '  not 
be  lawful  for  any  body  politic  or  corporate,  erected  or  to  be 
erected,  other  than  the  corporation  thereby  intended  to  be 
created  and  erected  into  a  national  bank,  or  for  any  other 
persons  whatsoever  united  or  to  be  united  in  covenant  or 
partnership  exceeding  the  number  of  six  persons,  to  borrow, 
owe,  or  take  up  any  sum  or  sums  of  money  on  their  bills  or 
notes  payable  at  demand,  or  at  any  less  time  than  six  months 
from  the  borrowing  thereof. ' '  This  provision  left  it  in  the 
power  of  individuals  and  firms  of  small  numbers  to  issue 
notes,  and  this  privilege  was  availed  of  to  a  great  extent 
after  the  suspension  of  cash  payments.  Noth withstanding 
the  worthless  character  of  many  of  these  institutions,  the 
demand  for  currency  was  so  imperative  that  large  quantities 
of  notes  were  easily  floated  and  great  distress  occurred,  after 
1820,  when  the  number  of  institutions  outside  the  Bank  of 
Ireland  had  been  reduced  to  six.  The  Bank  of  Ireland  was 
permitted  by  an  Act  of  1821  (chapter  27)  to  resume  cash 
payments  on  June  ist  of  that  year. 

The  absence  of  a  proper  circulating  medium,  in  spite  of 
the  monopoly  enjoyed  by  the  Bank  of  Ireland,  led  to  a  pro- 


1  MacLeod,  Theory  of  Credit,  II.,  609. 


i;8          HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

vision  in  the  act  which  increased  the  capital  of  the  bank, ' 
that  the  bank  should  surrender  its  monopoly  outside  the 
circuit  of  fifty  Irish  miles  from  Dublin.  Companies  of  more 
than  six  partners  were  henceforth  authorized  to  do  a  bank- 
ing business  and  to  issue  circulating  notes  outside  the  pro- 
posed limit.  A  party  of  English  capitalists  determined  to 
take  advantage  of  this  provision  and  at  a  meeting  in  London 
on  June  n,  1824,  resolved  to  found  a  bank  with  a  capital 
of  ^2,000,000  in  shares  of  ^100  each,  of  which  one-fourth 
was  to  be  paid  up.  Subscriptions  were  received  far  beyond 
the  amount  needed  before  the  end  of  the  year  and  the  capital 
of  the  Provincial  Bank  of  Ireland,  which  was  thus  estab- 
lished, has  never  been  increased  except  in  1836,  when  ^"40,- 
ooo  was  transferred  to  the  capital  from  the  ' '  rest ' '  or  reserve 
fund.  The  monopoly  enjoyed  by  the  Bank  of  Ireland  in 
Dublin  made  it  necessary  to  keep  the  head  office  of  the  new 
bank  in  Condon,  but  an  agency  was  established  in  Dublin 
and  Messrs.  La  Touche  and  Company  acted  as  agents  until 
1838,  when  the  bank  opened  its  own  office. 

The  Provincial  Bank  rapidly  extended  its  branches 
throughout  Ireland,  establishing  them  at  Cork,  Limerick, 
Clonmel,  and  Londonderry  in  1825  ;  at  Sligo,  Wexford,  Bel- 
fast, Waterford,  and  Gal  way  in  1826,  and  at  other  towns  in 
successive  years.  The  Bank  of  Ireland,  which  had  been 
content  with  its  head  office  until  it  found  competitors  in  the 
field,  began  a  policy  of  opening  branches  and  established 
them  at  Cork,  Waterford,  Clonmel,  Londonderry,  Newry, 
Belfast,  and  Westport  almost  as  soon  as  the  prospectus  of  the 
Provincial  Bank  had  appeared.  They  began  an  action  of 
law  against  the  Provincial  Bank  in  December,  1828,  because 
of  the  payment  of  the  latter' s  notes  in  Dublin.  The  jury 
found  in  favor  of  the  Bank  of  Ireland  upon  the  law  and  the 
evidence,  but  awarded  damages  at  sixpence,  with  costs  of  a 
like  amount,  as  evidence  of  the  feeling  in  the  business  com- 
munity of  Dublin  against  the  narrow  policy  of  the  bank. 
The  restiveness  of  the  merchants  was  further  indicated  in  a 
petition  to  the  Lords  of  the  Treasury  for  the  establishment 

'2  George  IV.,  c.  72. 


BANKING  IN  IRELAND.  1 79 

of  joint  stock  banks  in  Dublin,  which  led  to  a  compromise. 
An  Act  was  passed  in  1830,  making  lawful  the  payment  of 
notes  in  Dublin  by  the  issuing  bank  for  the  purpose  of  with- 
drawing them  from  circulation.  The  Provincial  Bank  ob- 
tained the  privilege  in  1827  of  receiving  the  revenues  of  the 
excise,  stamps,  and  postal  service  outside  the  Dublin  district 
reserved  to  the  Bank  of  Ireland.  Collectors  of  revenue  were 
authorized  in  the  same  year  to  receive  the  notes  of  the  bank 
in  the  same  manner  as  those  of  the  Bank  of  Ireland. 

The  Acts  of  1820  and  1825  made  it  possible  to  establish 
joint  stock  banks  in  different  parts  of  Ireland  and  several  of 
these  were  soon  incorporated.  The  first  was  the  Northern 
Banking  Company,  founded  by  the  partners  of  a  private  bank 
of  the  same  name  in  Belfast.  An  attempt  was  made  to  convert 
this  bank  into  a  joint  stock  bank  in  1820,  but  it  was  found 
necessary  to  await  a  change  of  the  law  requiring  the  residence 
of  all  the  partners  in  Ireland.  The  bank  began  business  in  its 
new  character  in  January,  1825,  with  a  capital  of  ,£500,000. 
The  capital  was  increased  in  1867  to  ,£1,000,000  and  has 
since  been  increased  to  ,£2,000,000,  of  which  ,£400,000  has 
been  paid  in.  The  Northern  Banking  Company  purchased 
the  business  of  Messrs.  Ball  and  Co.,  of  Dublin  in  1888  at  a 
cost  of  ,£22,500  and  opened  an  office  at  the  capital.  The 
Belfast  Banking  Company  was  another  institution  which 
was  founded  upon  a  private  company.  It  began  business  as 
a  joint  stock  bank  of  issue  on  August  i,  1827,  with  a  capital 
°f  ^500,000,  of  which  ,£125,000  was  paid  in.  The  capital 
was  increased  in  1866  to  /i, 000,000  and  in  1883  to  ,£2,000,- 
ooo  with  £"400,000  paid  in. 

The  National  Bank  of  Ireland  was  founded  in  1835  as  the 
result  of  the  Nationalist  feeling  in  the  country.  It  began 
business  at  the  Carrick-on-Suir  with  a  subscribed  capital  of 
;£i, 000,000  and  consisted  at  first  of  separate  bodies  of  share- 
holders, English  and  Irish.  When  a  branch  was  opened, 
the  local  share-holders  subscribed  a  portion  of  the  capital 
and  the  English  proprietors  contributed  a  like  amount. 
The  profits  were  divided  evenly  between  the  two  interests, 
but  the  system  proved  inconvenient  and  the  stocks  were 


180         HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

consolidated  in  1837  except  in  two  branches,  where  the 
consolidation  was  delayed  until  1856.  Daniel  O'Connell 
was  the  first  governor  of  the  bank  and  his  name  caused 
the  institution  to  be  dubbed  "The  Liberator's  Bank" 
and  made  way  for  its  notes  all  over  Ireland.  The  only 
other  bank  of  issue  which  is  still  doing  business  is  the 
Ulster  Bank,  founded  in  1836,  at  Belfast.  The  capital  was 
originally  ,£1,000,000,.  which  has  since  been  increased  to 
,£2,400,000,  with  ^"400,000  paid  up.  The  profits  paid  in 
dividends  to  the  shareholders  were  twenty  per  cent,  annu- 
ally from  1866  to  1885  and  have  been  only  a  little  less  in 
subsequent  years.  The  Royal  Bank  of  Ireland  was  estab- 
lished at  Dublin  in  1836,  but  was  restrained  by  the  monopoly 
of  the  Bank  of  Ireland  from  issuing  notes,  and  was  found  in 
this  condition  in  1845  by  the  legislation  confirming  the 
power  of  issue  to  the  banks  which  then  possessed  it.  The 
Royal  Bank,  although  a  powerful  and  profitable  institution, 
was,  therefore,  never  enrolled  among  Irish  banks  of  issue. 

The  foundation  of  the  National  Bank  was  intended  to 
offset  in  a  measure  the  collapse  of  the  Agricultural  and 
Commercial  Bank  of  Ireland,  which  was  established  in  1834 
by  the  appeals  of  a  Dublin  baker,  Mr.  Thomas  Mooney,  to 
the  patriotism  of  the  Irish  people.  Mr.  Mooney  bore  the 
same  name  as  a  Dublin  capitalist  of  wealth  and  standing  and 
he  secured  as  one  of  the  directors  a  stationer  named  James 
Chambers,  which  was  also  the  name  of  a  distinguished 
Dublin  financier  who  was  a  director  of  the  Bank  of  Ireland. 
The  impression  generally  prevailed  that  these  two  eminent 
gentlemen  were  interested  in  the  new  bank  and  Mr.  T.  M. 
Gresham,  who  was  brought  into  the  bank  just  before  its 
collapse,  testified  before  a  committee  of  the  House  of  Com- 
mons that  ' '  there  is  no  manner  of  doubt  that  we  were  all 
deceived  in  two  names  in  that  bank."  The  capital  of  the 
Agricultural  Bank  was  gathered  up  from  all  sorts  of  humble 
people  by  appeals  to  their  Irish  patriotism  and  parts  of  it 
were  obtained  by  liberal  discounts  to  those  who  presented 
commercial  bills.  A  meeting  of  the  shareholders  after  the 
collapse  of  the  bank  was  attended  by  two  steamboat- loads 


BANKING  IN  IRELAND.  l8l 

from  Belfast,  most  of  whom  had  their  expenses  paid  by  the 
directors,  and  another  contingent  came  from  the  south  of 
Ireland  in  canal  boats.  The  branch  managers  of  the  bank 
were  selected  according  to  their  holdings  of  stock  and  acted 
in  reckless  disregard  of  orders  from  the  head  office,  even  to 
the  extent  of  raising  their  own  salaries  and  dating  the 
increase  back  to  the  time  of  their  appointment. l  The  nom- 
inal capital  of  the  Agricultural  Bank  was  ;£i, 000,000,  but  it 
was  admitted  that  at  the  time  of  beginning  business  it  did 
not  actually  exceed  ^3,000.  The  first  branch  was  opened 
at  Nenagh,  Tipperary  County,  in  November,  1834,  and  the 
bank  was  compelled  to  close  its  doors  on  November  14,  1836. 
A  special  act  of  Parliament  was  required  to  wind  up  the 
affairs  of  the  bank  and  an  attempt  to  put  it  on  its  feet  under 
a  new  organization  failed  in  1841. 

The  Tipperary  joint  stock  bank,  which  succeeded  Scully's 
private  bank  in  1838,  did  not  issue  its  own  notes,  but  had  an 
arrangement  with  the  Bank  of  Ireland  by  which  its  paper 
was  discounted.  The  power  was  reserved  to  the  Tipperary 
bank  by  the  Act  of  1845  to  take  tne  same  amount  of  issue 
as  it  would  have  been  entitled  to  in  case  of  the  termination 
of  the  agreement  with  the  Bank  of  Ireland,  so  that  it  was 
recognized  as  connected  with  the  system  of  banks  of  issue. 
The  directors  of  the  institution  when  it  became  a  joint  stock 
bank  were  John  Sadlier,  his  brother  James,  and  Mr.  James 
Scully.  The  capital  of  the  bank  was  ,£100,000,  a  portion 
of  which  was  held  in  Kngland,  and  favorable  reports  were 
regularly  made  and  large  dividends  declared  for  some  seven- 
teen years.  Prosperity  seemed  to  reign  in  the  affairs  of  the 
bank  until  February,  1856,  when  the  doors  were  closed,  less 
than  a  month  after  the  issue  of  a  favorable  report  and  the 
declaration  of  a  dividend.  It  was  found  that  John  Sadlier 
had  systematically  robbed  the  bank  and  falsified  the  accounts. 
Sadlier  was  one  of  the  brilliant  swindlers  who  so  often  take 
the  world  by  storm  and  persuade  shrewd  men  of  business  to 
embark  with  them  in  great  enterprises.  He  had  piloted 
through  Parliament  several  important  railway  bills,  obtained 

1  Dillon,  71-77. 


1 82          HISTORY  OF  MODERN  BANKS   OF  ISSUE. 

the  reputation  of  immense  wealth,  been  elected  member  of 
Parliament  for  Carlow,  and  was  offered  and  accepted  the 
position  of  a  Junior  I/)rd  of  the  Treasury.  He  became 
chairman  of  the  London  and  County  Bank  in  1848,  chair- 
man of  the  Royal  Swedish  Railway  and  a  director  in  num- 
erous stock  companies.  Towards  the  close  of  his  career  he 
indiscriminately  used  all  the  funds  of  either  corporation  he 
could  lay  his  hands  on,  issued  duplicate  shares  in  the  rail- 
way company  and  forged  documents  which  he  deposited  as 
security  for  advances  from  other  bankers.  His  forgeries 
began  to  be  suspected,  the  Tipperary  Bank  collapsed,  and  on 
February  17,  1856,  Sadlier's  body  was  found  by  a  laborer 
crossing  Hampstead  Heath,  lying  on  the  ground  with  a 
bottle  labelled  "  poison  "  beside  it.1 

The  Banking  Act  of  1845,  following  the  similar  legisla- 
tion for  England  and  Scotland,  repealed  the  acts  of  Parlia- 
ment which  prohibited  the  formation  of  stock  companies  for 
banking  with  more  than  six  partners.  This  threw  down  the 
bars  to  all  comers,  so  far  as  the  organization  of  banks  of 
discount  and  deposit  was  concerned,  but  circulation  was  put 
in  a  straight  jacket,  as  in  the  case  of  the  English  banks. 
The  authorized  issue  of  circulating  notes  after  December  6, 
1845,  was  not  to  be  permitted  to  exceed,  upon  an  average 
of  four  weeks,  the  average  amount  of  the  circulation  for  the 
year  ending  on  the  first  day  of  May,  1845."  If  any  two 
banks  united,  they  were  allowed  to  maintain  the  aggregate 
authorized  circulation  of  both  the  old  banks,  and  if  any  bank 
surrendered  its  issue  or  agreed  to  issue  Bank  of  Ireland  notes, 
the  Bank  of  Ireland  was  allowed  to  increase  its  issues  to  the 
full  amount  of  the  notes  withdrawn.  The  law  differed  in 
this  respect  from  the  English  act,  which  limited  the  increase 
in  Bank  of  England  issues  in  such  cases  to  two-thirds  of  the 
issues  withdrawn. 

The  Irish  law  differed  in  an  important  respect  from  the 
English  banking  act  in  regard  to  the  additional  circulation 

1  Dillon,  81-86. 

8  8  and  9  Victoria,  c.  37,  sec.  19. 


BANKING  IN  IRELAND.  183 

•which  the  banks  were  authorized  to  issue  against  deposits 
of  coin  and  bullion.  This  privilege  was  accorded  to  all  the 
Irish  banks  of  issue, — instead  of  but  one,  as  in  the  case  of 
England, — and  they  were  thus  put  upon  an  equal  footing 
with  no  apparent  purpose  of  concentrating  issues  finally  in  a 
single  institution.  The  Irish  banks  are  required,  however, 
to  keep  the  coin  held  against  additional  circulation  wholly 
at  their  head  offices,  while  all  their  notes  are  required  to  be 
redeemed  on  demand  at  the  place  or  places  where  issued. 
These  requirements  compel  them  to  keep  a  supply  of  coin  at 
every  branch,  in  order  to  redeem  notes  issued  from  that 
branch,  and  it  is  the  practice  for  a  bank  to  redeem  any  of  its 
notes  at  any  of  its  branches  where  they  may  be  presented. 
The  fact  that  the  privilege  of  additional  issues  has  been 
availed  of  to  only  a  limited  extent,  while  the  coin  holdings 
of  the  banks  have  been  large,  would  seem  to  indicate  that 
the  fixed  limit  of  authorized  issues  has  not  operated  greatly 
to  restrain  the  business  development  of  Ireland.  One  reason 
for  this  is  doubtless  found  in  the  fact  that  the  population  and 
the  volume  of  business  were  so  greatly  decreased  in  the 
famine  years,  while  the  authorized  circulation  remained 
untouched.  The  limit  has  proved  in  practice  so  generous 
that  Ireland  has  enjoyed  a  currency  fluctuating  with  the 
seasons  and  with  the  varying  demand  for  money,  in  much 
the  same  manner  as  an  untrammelled  banking  currency. 

The  circulation  was  nearly  ,£1,000,000  above  the  limit  in 
1846,  standing  at  £7, 266,000,  but  declined  as  low  as  ,£4,310- 
ooo  in  1849.  The  average  returned  in  1854  to  ,£6,296,000 
and  increased  pretty  steadily  until  1860,  when  it  stood  at 
,£6,840,000.  A  decline  then  set  in,  which  reached  its  lowest 
ebb  in  1863  at  ,£5,405,000.  Another  period  of  increase 
carried  the  average  circulation  for  1872  as  high  as  ,£7,674,000, 
after  wrhich  it  fell  to  ,£6, 065,000  in  1879,  rose  to  ,£7, 297,000 
in  1882  and  fell  to  ,£5,885,000  in  1887, — the  lowest  average 
for  twenty  years.  The  authorized  circulation  of  each 
bank,  with  the  circulation  and  specie  holdings  for  the  four 
weeks  ending  July  25,  1908,  is  shown  in  the  following 
table : 


1 84 


HISTORY  OF  MODERN  BANKS  OF  ISSUE. 


Circulation  of  Irish  Banks. 


NAME  OF   BANK. 

AUTHORIZED 
CIRCULATION. 

AVERAGE    CIR- 
CULATION  FOR 
FOUR  WEEKS. 

AVERAGE 
AMOUNT   GOLD 
AND  SILVER 
HELD  FOR    FOUR 
WEEKS. 

Bank  of  Ireland  

•A  7^8  428 

/2,  ">OQ,  7  SO 

£   07^,771 

Provincial  Bank  of  Ireland 
Belfast  Bank 

927,667 
281  611 

685,927 

4Q4.  86? 

251,012 
•^44,528 

Northern  Bank      

247  44.0 

577,727 

430,506 

Ulster  Bank           

^II,O7Q 

885,088 

755,951 

The  National  Bank    

8^2  260 

i  181  748 

6q6,^7 

Total  

6  ^4  4Q4 

6,201,107 

^.452,105 

The  average  circulation  of  these  banks  for  February,  1914, 
v/as  £8,064,349,  of  which  £2,694,458  was  in  notes  for  less 
than  £5. 

The  elastic  character  of  the  Irish  currency,  in  spite  of  the 
restrictions  of  law,  gives  an  interest  to  the  fluctuations  dur- 
ing the  year  which  result  from  the  varying  demand  for 
money.  Beginning  with  January,  the  amount  of  the  circula- 
tion usually  declines, — slowly  at  first,  but  more  rapidly  in 
May,  June,  and  July,  until  it  reaches  its  lowest  point  at  the 
end  of  August.  Then  begins  the  process  described  by  Mr. 
Gilbart,  as  a  consequence  of  the  law  that  ' '  the  monthly  cir- 
culation must  depend  upon  the  quantity  of  produce  brought 
to  market  within  the  month  ' '  : 

Now,  it  has  been  the  custom  in  Ireland  to  commence  bringing  the 
produce  to  market  immediately  after  the  harvest.  Hence  arises  the 
increase  of  the  notes  in  September,  and  their  further  increase  in  the  fol- 
lowing month.  But  in  the  beginning  of  the  year  the  landlords  collect 
their  rents,  and  receive  from  their  tenants  the  notes  for  which  this 
produce  has  been  sold  ;  this  brings  the  notes  back  to  the  bank,  either 
to  be  placed  to  his  credit  (if  he  have  an  account  there),  or,  otherwise, 
in  exchange  for  a  letter  of  credit  on  Dublin,  or  a  bill  on  London. 
The  circuit  of  a  note,  then,  is  this  : — It  is  obtained  from  the  bank  by 
a  corn-merchant,  who  pays  it  to  a  farmer  for  his  corn,  which  he  ships 
to  England.  The  farmer  afterwards  pays  the  note  for  rent  to  his 
landlord,  who  brings  it  back  to  the  bank.  J 

One  of  the  peculiar  features  of  the  Irish  circulation,  like 
the  Scottish,  is  the  large  proportion  of  small  notes.  The 

1  The  History,  Principles,  and  Practice  of  Banking,  II.,  250. 


BANKING  IN  IRELAND.  185 

Select  Committee  of  the  House  of  Commons  in  1826  recom- 
mended fixing  a  limit  of  time  in  the  future  beyond  which 
the  circulation  of  notes  below  ^5  should  cease,  but  the  testi- 
mony given  before  the  committee  was  against  such  a  restric- 
tion and  it  was  not  adopted.  The  arguments  made  against 
the  restriction  were  that  it  would  check  the  growth  of 
manufactures,  make  difficult  the  sale  of  small  lots  of  agri- 
cultural produce,  and  curtail  the  accommodation  which  the 
banks  are  able  to  give  their  customers  and  especially  their 
cash  credits.  The  transfer  of  gold,  it  was  pointed  out,  would 
be  inconvenient  and  costly,  and  once  sent  out  of  the  country 
it  would  rarely  come  back.  The  Act  of  1845  prohibited  notes 
of  fractions  of  ^i  and  required  the  banks  in  their  reports  to 
state  separately  the  notes  in  circulation  under  ^5.  These 
returns  have  shown  a  large  proportion  of  small  notes  in  cir- 
culation and  a  marked  increase  from  September  to  January 
over  the  spring  and  summer  months.  This  circulation  of 
small  notes  has  contributed,  with,  the  widely  diffused  system 
of  branches,  and  the  existence  of  several  strong  joint  stock 
banks  without  the  power  of  issue,  to  afford  reasonably  ade- 
quate facilities  for  the  development  of  banking  in  Ireland. 
The  number  of  banking  offices  in  Ireland  increased  from  333 
in  1872  to  571  in  1895  and  863  in  1913. 


CHAPTER  VIII. 

THE   BANKS   OF   GERMANY. 

The  Bank  of  Prussia  and  the  Share  of  the  State  in  its  Profits — Other 
Banks  of  Issue  in  Prussia  and  the  Smaller  States  of  Germany— 
The  Reform  of  Currency  and  Banking  under  the  Empire — The 
Sales  of  Silver  and  the  Withdrawal  of  Paper  Money — Legal-Tender 
Character  of  the  Bank-Notes  and  the  Reforms  of  1909. 

THE  existing  banking  system  of  the  German  Empire  is 
a  part  of  the  fabric  of  imperialism  which  was  so  in- 
dustriously built  up  by  Prince  Bismarck  from  the  be- 
ginning of  his  premiership  in  1862  until  his  retirement  from 
office.  The  Imperial  Bank  of  Germany  is  in  a  measure  an 
expansion  and  development  of  the  Bank  of  Prussia,  which 
was  founded  in  the  time  of  Frederick  the  Great,  but  it  has 
already  absorbed  the  circulation  belonging  to  the  banks  of 
most  of  the  other  German  states  and  is  authorized  to  absorb 
the  entire  paper  circulation  of  the  Empire  as  it  is  surrendered 
by  the  local  banks,  in  much  the  same  manner  as  the  Bank 
of  England  is  authorized  by  the  Act  of  1844  to  absorb  the 
circulation  of  the  country  banks  of  England  and  Wales. 
The  circulation  of  the  Imperial  German  Bank,  while  mod- 
elled in  many  respects  on  that  of  the  Bank  of  England,  is 
capable  of  a  somewhat  greater  degree  of  elasticity,  by  virtue 
of  a  legal  provision  for  an  emergency  circulation  above  the 
usual  limit,  and  the  notes  are  now  legal  tender. 

The  Bank  of  Prussia  was  created  by  virtue  of  an  edict  of 
June  17,  1765,  under  the  name  of  the  Royal  Bank  of  I^oans 
and  Current  Accounts  at  Berlin  (Konigliche  Giro-  und  Lehn- 
bank  211  Berlin}  with  a  capital  of  1,000,000  thalers  ($750,000) 

1 86 


THE  BANKS   OF  GERMANY.  l8/ 

and  was  at  first  exclusively  an  institution  of  state.  It  con- 
tinued to  be  a  state  institution  until  1846,  when  the  new  de- 
mands for  capital  for  railways  and  for  the  extension  of 
commercial  relations  led  to  an  extension  of  the  scope  of  the 
bank  and  an  appeal  to  private  capital  to  carry  it  on.  Two 
ordinances  of  April  14  and  July  18,  1846,  authorized  the 
increase  of  the  capital  by  a  sum  of  10,000,000  thalers  ($7,500,- 
ooo)  and  admitted  the  shareholders  to  a  part  in  the  adminis- 
tration by  means  of  a  central  commission  composed  of  fifteen 
members,  who  were  authorized  to  appoint  a  commitee  of  three 
to  exercise  a  regular  supervision  over  the  acts  of  the  direc- 
tors. *  The  capital  owned  by  the  State  had  been  increased  by 
the  setting  aside  of  profits  until  it  had  reached  in  1846  1,197,- 
553  thalers  ($900,000),  and  the  portion  furnished  by  the  pub- 
lic was  increased  in  May,  1856,  to  15,000,000  thalers  and 
again  by  the  law  of  September  24,  1866,  to  20,000,000  thalers, 
($15,000,000),  divided  into  shares  of  a  par  value  of  one 
thousand  thalers  each.  The  capital  credited  to  the  state  had 
been  increasing  in  the  meantime  until  it  attained  in  Decem- 
ber, 1867,  a  total  of  1,897,800  thalers  ($1,425,000). 

The  government  took  care  to  keep  its  hands  firmly  on  the 
direction  of  the  bank,  in  spite  of  the  new  privileges  given 
the  shareholders,  and  limited  the  right  to  participate  in  the 
general  assembly  of  shareholders  to  the  two  hundred  hold- 
ing the  largest  amount  of  stock  domiciled  in  Prussia.  Su- 
preme control  was  reserved  directly  and  exclusively  to  a 
privy  council  {Bank  Kuratorium) ,  composed  of  the  Presi- 
dent of  the  Council  of  Ministers,  the  Ministers  of  Finance, 
of  Justice,  and  of  Commerce,  and  a  fifth  member  named  by 
the  King.  The  direct  management  also  was  confided  to  a 
director  and  a  committee  of  direction  appointed  upon  the 
King's  nomination.  This  official  control  was  compensated 
in  a  measure  by  exemptions  from  imposts  and  from  certain 
taxes  which  were  imposed  upon  other  similar  establishments. 
The  bank  was  compelled,  however,  to  pay  interest  on  the 
deposit  of  the  public  funds  and  to  pay  three  and  a  half  per 


Noel,  I.,  246. 


I  88          HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

cent,  upon  the  capital  contributed  by  the  State  and  half  the 
net  profits  remaining  after  the  payment  of  a  dividend  of  a 
like  amount  to  the  shareholders.  The  receipts  of  the  gov- 
ernment from  these  sources,  including  interest  on  its  own 
stock,  attained  a  very  considerable  figure  during  the  eight 
years  prior  to  its  transformation  into  the  new  Imperial  Bank, 
amounting  to  3,166,436  thalers  in  1873  ;  1,711,920  thalers  in 
1874  ;  and  2,284,875  thalers  in  1875. 

The  accounts  of  the  Bank  of  Prussia  afford  a  good  illus- 
tration of  the  principle  that  banks  of  issue  usually  precede 
mere  banks  of  discount  and  deposit  as  a  means  of  familiar- 
izing the  public  with  banking  methods.  There  were  scarcely 
any  deposits  in  the  early  history  of  the  bank,  except  those 
made  by  the  government  and  upon  which  interest  was  paid 
by  the  bank.  These  government  deposits  came  from  the 
trust  funds  of  the  courts,  including  those  of  guardianship, 
and  the  administration  of  churches,  schools,  hospitals,  and 
other  charitable  foundations  and  public  institutions.  Their 
magnitude  constantly  grew  and  their  use  by  the  bank  gave 
it  loanable  funds  which  it  could  not  otherwise  have  obtained 
except  by  an  issue  of  notes  upon  commercial  paper  dispro- 
portionate to  its  original  capital.  This  money  entrusted  to 
the  bank  enabled  it  to  do  a  discount  business  which  steadily 
grew  with  the  expansion  of  commerce  in  Prussia  and  among 
her  neighbors.  The  aggregate  of  the  discount  business  of 
the  year  rose  from  1,581,956,399  marks  ($395,000,000)  in 
1867  to  2,630,469,468  marks  in  1871,  3,958,299,756  marks  in 
1872,  and  5,350,216,312  marks  in  1873.  The  business  depres- 
sion which  began  in  the  latter  year  forced  the  discounts  down 
to  4,136,089,162  marks  in  1874  and  to  4,099,613,175  marks 
($1,025,000,000)  in  1875. 

One  of  the  peculiarities  of  the  Bank  of  Prussia,  which  ex- 
tended to  many  other  German  banks,  was  the  practice  of 
making  loans  upon  merchandise  as  well  as  upon  bullion 
and  the  pledge  of  securities.  Business  of  this  kind  was  al- 
ways kept  within  conservative  limits  and  the  statutes  of  the 
Bank  of  Prussia  admitted  the  precious  metals  at  a  valuation 
of  only  95  per  cent,  of  their  real  value  and  merchandise  at 


THE  BANKS  OF  GERMANY.  189 

from  50  to  60  per  cent.  The  valuation  of  negotiable  securi- 
ties was  determined  by  the  officers  of  the  bank.  All  these 
operations  were  limited  in  amount  and  were  required  to  run 
for  terms  no  longer  than  bills  of  exchange,  for  which  the 
maximum  was  three  months.  The  number  of  loans  of  this 
sort  steadily  declined  during  the  latter  years  of  the  history 
of  the  bank,  while  the  amount  increased,  reaching  a  maxi- 
mum in  1872  of  824,840,690  marks  ($206,000,000),  including 
securities. 

The  issue  of  circulating  notes  was  the  chief  means  by 
which  the  Bank  of  Prussia  was  able  to  utilize  its  assets  and 
there  was  no  limit  of  law  after  1856  upon  the  volume  of  the 
issues.  The  law  of  1846  forbade  the  issue  of  bills  for  a 
greater  sum  than  21,000,000  thalers  ($15,750,000),  but  the 
repeal  of  this  provision  in  1856  left  the  bank  untrammelled, 
except  as  the  opinion  of  the  banking  community  imposed  a 
relation  of  one  to  three  between  the  metallic  reserve  and  the 
circulation.  The  bills  were  not  a  legal  tender  and  were  re- 
deemable in  coin  on  demand,  but  they  were  accepted  in  pub- 
lic depositories  by  virtue  of  a  royal  ordinance  of  June  9, 
1847.  The  denominations  were  limited  to  ten,  twenty-five, 
fifty,  one  hundred,  and  five  hundred  thalers,  equivalent  to  a 
minimum  of  $7.50  and  a  maximum  of  $375.  A  further 
limitation  was  imposed  that  bills  of  the  smallest  denomina- 
tion should  not  exceed  a  total  of  10,000,000  thalers  ($7,500,- 
ooo),  and  in  fact  their  number  never  surpassed  957,000  in 
the  ten  years  preceding  consolidation  with  the  Bank  of  the 
Empire  and  had  descended  in  1875  to  520,000  ($3,900,000). 
The  maximum  note  circulation  in  1860  was  93,029,000  tha- 
lers ($70,000,000);  in  1865,  136,148,000  thalers,  and- 1870 
202,488,000  thalers.  The  increase  was  more  rapid  in  the 
next  few  years  and  carried  the  maximum  in  1871  to  242,242,- 
ooo  thalers  ;  in  1872,  to  311,531,000  thalers  ;  in  1873  to  342,- 
290,000  thalers  ;  and  in  1874  to  297,412,000  thalers. 

The  reserve  of  the  Bank  of  Prussia  consisted  of  gold  and 
silver  coin  and  bullion,  public  securities,  bills  of  Prussian 
private  banks,  and  securities  payable  at  sight  or  otherwise 
and  until  1869  of  accepted  drafts  (Giro-Anweisungen).  The 


19°          HISTORY  OF  MODERN  BANKS   OF  ISSUE. 

total  of  this  reserve  reached  in  1875  about  1,900,000,000 
marks  ($475,000,000).  The  proportion  of  coin  and  bullion 
seldom  exceeded  one-third  of  this  aggregate.  The  maximum 
in  1860  was  77,457,000  thalers  ($58,000,000)  and  had  only 
reached  99,427,000  thalers  in  1870.  The  rapid  increase  of 
the  number  of  branches  of  the  bank  scattered  over  Prussia 
and  the  growth  of  commercial  operations  led  to  an  increase 
in  the  reserve  during  the  last  four  years  of  the  operations  of 
the  bank  commensurate  with  the  increase  in  its  circulation 
and  discounts,  so  that  the  maximum  in  1874  was  239,860,- 
ooo  thalers  ($180,000,000)  and  the  minimum  was  203,511,000 
thalers  ($152,000,000).  The  Bank  of  Prussia,  in  spite  of 
the  share  which  the  government  enjoyed  in  its  profits,  had 
no  monopoly  of  the  right  of  note  issue  in  the  Kingdom.  By 
its  side  and  in  competition  with  its  numerous  branches  ex- 
isted eight  local  banks,  including  one  at  Berlin,  whose  united 
capital  was  8,899,000  thalers  ($6,675,000)  and  which  had  the 
right  to  issue  bills  to  the  amount  of  7,000,000  thalers,  but  in 
no  case  of  a  smaller  denomination  than  ten  thalers  ($7.50).' 
The  branches  of  the  Bank  of  Prussia  increased  from  143  in 
1867  to  158  in  1870  and  167  in  1875. a 

The  other  German  states  were  not  without  flourishing 
banks  of  issue,  which  conformed  in  the  general  features  of 
their  organization  to  the  Bank  of  Prussia.  There  were 
thirty-three  German  banks  in  existence,  including  those  of 
Prussia,  when  the  Imperial  Bank  was  established  in  1875. 
Two  of  these  were  commercial  banks  and  one  was  a  terri- 
torial bank,  the  capital  in  each  of  these  cases  being  furnished 
by  the  municipality  or  the  State  and  the  liabilities  constituting 
a  general  claim  against  the  government  and  the  community. 
The  others  were  organized  as  stock  companies.  Three  of 
the  German  banks — the  Bank  of  Bremen,  founded  in  1856  ; 
the  Bank  of  Thuringia,  founded  in  1856  ;  and  the  Bank  of 
Anhalt-Dessau,  founded  in  1847 — ne^  charters  without 
limit  of  time,  which  were  regarded  as  perpetual.  The  char- 


1  Courcelle-Seneuil,  365. 

2  Noel,  I.,  250. 


THE  BANKS  OF  GERMANY.  19! 

ters  of  the  other  banks  ran  for  various  periods  from  one  year 
to  eighty-one  years.  The  charters  of  the  Bank  of  Gera, 
which  expired  in  1953,  and  of  the  Banks  of  Central  Germany 
and  Lower  Saxony,  which  expired  in  1956,  had  been  granted 
originally  for  one  hundred  years. 

The  oldest  of  the  banks  with  limited  charters  was  that  of 
Pomerania,  established  at  Stettin  in  1821,  with  a  capital  of 
6,000,000  marks.  The  others  were  :  The  Bavarian  Bank  of 
Mortgage  and  Exchange  at  Munich,  founded  in  1834 ;  the 
Bank  of  Leipzig,  in  1839  ;  the  Communal  Bank  of  Breslau, 
in  1848 ;  the  Communal  Bank  of  Chemnitz,  in  1848  ;  the 
Bank  of  United  Deposits  of  Berlin,  in  1850 ;  the  Bank  of 
Rostock,  in  1850;  the  Bank  of  Weimar,  in  1853  ;  the  Bank 
of  Gera,  in  1854  ;  the  Bank  of  Frankfort,  in  1854  ;  the  Bank 
of  Southern  Germany,  at  Darmstadt,  in  1855  ;  the  Bank  of 
Cologne,  in  1856  ;  the  Bank  of  Magdeburg,  in  1856  ;  the  Pri- 
vate Bank  of  Lubeck,  in  1856  ;  the  Territorial  Bank  of  Hesse, 
at  Homburg,  in  1856  ;  the  Bank  of  Hanover,  at  Hanover, 
in  1856  ;  the  Private  Bank  of  Gotha,  in  1856  ;  the  Bank  of 
Central  Germany,  at  Meiningen,  in  1856  ;  the  Bank  of  Lower 
Saxony,  at  Buckebourg,  in  1856  ;  the  Bank  of  Dantzig,  in 
1857  ;  tne  Bank  of  Pozen,  in  1857  ;  the  Bank  of  Brunswick, 
in  1857  >'  tne  Commercial  Bank  of  Lubeck,  in  1865  ;  the 
Bank  of  Saxony,  at  Dresden,  in  1865  ;  the  Territorial  Bank 
of  Gorlitz,  in  1866  ;  the  Bank  of  United  Deposits,  at  Leipzig, 
in  1867  ;  the  Territorial  Bank  of  Oldenburg,  in  1868  ;  the 
Bank  of  Baden,  at  Mannheim,  in  1870  ;  and  the  Bank  of 
Wurtemburg  at  Stuttgard,  in  1871.  The  Prussian  banks  in 
this  list  are  those  at  Stettin,  Breslau,  Cologne,  Gorlitz, 
Magdeburg,  Dantzig,  and  Pozen,  and  the  Bank  of  United 
Deposits  at  Berlin. 

Many  of  these  banks  were  born  of  the  financial  necessities 
of  the  governments  by  which  they  were  chartered  and  were 
under  obligations  to  aid  the  public  Treasury.  The  Bank  of 
Homburg  was  required  to  loan  to  the  government  up  to  a 
maximum  of  100,000  florins  ($42,000)  at  three  per  cent. ;  the 
Bank  of  Gotha  was  required  to  advance  to  the  Treasury 
a  maximum  sum  of  200,000  thalers  ($150,000)  at  four  per 


192  HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

cent.  ;  the  Bank  of  Bremen  was  required  to  loan  a  maximum 
of  200,000  thalers,  and  the  Bank  of  Buckebourg  was  under 
obligations  to  make  advances  to  the  amount  of  400,000 
thalers  without  interest,  on  the  condition  that  the  government 
deposit  public  securities  paying  an  interest  of  four  per  cent. ' 
The  State  exercised  a  more  or  less  complete  control  over  all 
these  local  banks,  in  some  cases  appointing  the  officials  and 
in  others  limiting  its  action  to  inspection  and  suggestion. 
The  Banks  of  Bremen  and  Frankfort  were  among  those  en- 
joying comparative  freedom,  being  subject  only  to  public 
control  when  it  was  judged  desirable. 

The  operations  of  these  banks  before  1875  consisted,  like 
the  operations  of  the  Bank  of  Prussia,  in  the  discount  of 
commercial  paper,  the  negotiations  of  foreign  and  domestic 
bills  of  exchange,  advances  upon  public  stocks  and  the  pre- 
cious metals  and  in  some  cases  upon  mortgages,  and  the 
pledge  of  securities  and  property.  The  building  of  railways, 
the  increased  productive  power  of  the  community,  and  the 
consequent  increase  in  capital,  brought  a  rapid  extension  of 
business  to  the  German  banks  during  the  ten  years  before 
they  become  subordinate  to  the  German  Imperial  Bank. 
The  aggregate  commercial  discounts  of  all  except  the  Bank 
of  Prussia  increased  from  126,629  in  number  and  693,420,- 
537  marks  ($167,000,000)  in  amount  in  1867  to  535,302  in 
number  and  2,797,759,142  marks  ($675,000,000)  in  amount 
in  1874.  The  management  of  the  local  state  banks  was  for 
the  most  part  prudent  and  conservative  and  they  were  doing 
a  safe  and  profitable  business  when  they  were  arrested  in 
their  growth  by  the  policy  of  consolidation.  Most  of  them 
had  branches  in  the  neighboring  towns  and  cities,  reaching 
a  total  of  nearly  fifty  establishments  besides  the  parent  banks. 
They  were  required  by  the  laws  of  most  of  the  states  to  set 
aside  a  portion  of  their  profits  as  a  reserve  fund  and  this  fund 
increased  from  12,270,712  marks  ($3,000,000)  in  1867  to  34,- 
332,457  marks  ($8,200,000)  in  1875. 

The  aggregate  circulation  of  the  banks  outside  the  Bank 


1  Noel,  I.,  263. 


THE  BANKS  OF  GERMANY.  193 

of  Prussia  was  181,635,305  marks  ($45,000,000)  in  1867,  242,- 
502,653  marks  in  1869,  432,799,730  marks  in  1872  and  487,- 
020,519  marks  in  1874.  The  circulation  of  the  Bank  of 
Prussia  on  the  latter  date  was  838,422,000  marks,  making 
a  total  bank-note  circulation  for  all  the  states  of  Germany 
of  1,325,442,519  marks  ($320,000,000).  The  banks  showing 
the  largest  circulation  in  1874  were  those  at  Dresden,  99,727,- 
440  marks  ;  at  Mannheim,  51,901,428  marks  ;  at  Darmstadt, 
46,327,015  marks  ;  at  Frankfort,  45,208,833  marks  ;  at  Leip- 
zig, 28,464,069  marks;  at  Stuttgard,  25,477,028  marks  ;  and 
at  Meiningen,  24,000,000  marks. 

The  narrow  limits  of  many  of  the  German  states  and  their 
commerce  with  each  other  led  to  the  mutual  circulation  of 
their  bills  in  spite  of  the  absence  of  any  legal  tender  quality 
even  within  the  limits  of  the  state  where  they  were  issued.  * 
The  banks  of  some  of  the  smaller  states  took  advantage  of 
the  wide  circulation  of  their  bills,  and  the  lack  of  require- 
ments for  prompt  redemption,  by  swelling  their  issues  and 
by  various  artifices  for  getting  the  notes  into  circulation  at 
distant  points.  Though  legally  redeemable  in  coin  on  de- 
mand, the  small  denominations  of  the  notes  and  the  diffi- 
culty of  getting  them  to  the  counters  of  the  issuing  banks 
threatened  to  create  a  practically  irredeemable  and  redundant 
currency,  which  would  expel  coin  and  bring  the  country  to 
a  paper  basis.  ' '  They  might  without  difficulty  have  reme- 
died this  abuse,"  says  M.  Courcelle-Seneuil,  "by  means  of 
a  system  of  mutual  exchange  and  liquidation  among  the 
banks  themselves,  such  as  is  practised  in  Scotland,  and  the 
principal  banks  had  in  their  hands  every  power  to  enforce 
this  exchange  upon  the  banks  of  the  small  states."  a  But 
other  means  of  reaching  the  difficulty  were  adopted,  and  the 
initiative  was  taken  by  Prussia,  which  passed  an  act  on  May 
14,  1855,  forbidding  the  circulation  within  her  limits  of  for- 

1  The  legal  tender  quality  was  not  given  by  law  to  the  notes  of  any 
of  the  German  banks  and  was  expressly  disclaimed  by  the  laws  in- 
corporating the  banks  of  Pomerania,  of  Frankfort,  of  Homburg,  of 
Meiningen,  and  of  the  United  Deposits  at  Berlin. — Noel,  I.,  284. 

2  Trait^  des  Operations  de  Banque^  366. 


194          HISTORY  OF  MODERN  &ANKS  OF  ISSUE. 

eign  bills  payable  to  bearer,  without  interest,  of  a  value 
below  ten  thalers.  Saxony  took  similar  action  on  July  8, 
1855,  and  the  small  states  of  Thuringia  concluded  a  conven- 
tion January  21,  1856,  by  which  they  forbade  the  circulation 
of  foreign  bills  to  bearer  without  interest  and  below  ten 
thalers  in  denomination,  with  the  exception  of  the  bank 
drafts  of  Prussia  and  Saxony.  The  Grand  Duchy  of  Baden 
forbade  the  circulation  of  any  foreign  bills  on  December  24, 
1855,  except  those  issued  in  Prussia,  Bavaria,  and  Nassau 
and  at  Frankfort.  Prussia  extended  the  scope  of  her  pro- 
hibition on  May  25,  1857,  to  all  foreign  bills  except  those 
below  ten  thalers  issued  by  the  governments  of  Saxony, 
Thuringia,  and  Anhalt.  A  Saxon  ordinance  of  May  18, 
1857,  imposed  a  fine  of  fifty  thalers  upon  the  holders  of  for- 
eign bills  below  the  denomination  of  ten  thalers  except 
upon  banks  of  issue  which  carried  on  a  special  service  of 
exchange.1 

The  history  of  the  circulation  of  these  state  bills  outside 
of  the  limits  of  the  issuing  state  suggests  an  interesting 
comparison  with  the  circulation  of  the  notes  of  the  depart- 
mental banks  of  France  and  of  the  State  banks  of  the  United 
States.  The  banks  were  not  in  any  of  these  cases  closely 
linked  together  by  clearing  arrangements  and  the  means  of 
communication  and  the  promptness  of  commercial  transac- 
tions were  not  such  as  to  result  in  the  prompt  return  of  the 
notes  to  the  issuing  banks  for  redemption.  It  does  not 
appear  that  this  resulted  in  a  great  inflation  of  the  note 
issues,  even  in  the  United  States,2  but  it  naturally  aroused 
fears  that  the  banks  might  not  be  able  to  redeem  their  notes 
promptly  on  presentation  and  that  they  might  fall  below  par 


1  Noel,  I.,  288. 

2  M.  Wolowski,  who  is  one  of  the  warmest  champions  of  monopoly 
of  note  issues,  speaking  of  the  situation  in  1863,  says  :  "Twenty 
banks  issuing  45,000,000  thalers  (133,000,000)  for  thirty-two  states 
whose  population  exceeded  thirteen  millions,  is  not  too  much  as  to 
quantity ;    it  is  too  much  because  of  the  embarrassment  which  is 
caused  by   this   diversity  of  monetary   signs." — La    Question   des 
Banques,  404. 


THE  BANKS  OP  GERMANY.  195 

in  coin.  The  situation  in  France  differed  from  that  in  Ger- 
many and  the  United  States  in  the  respect  that  the  notes  of 
the  departmental  banks  were  made  legal  tender  after  the 
revolution  of  1848  within  the  department  where  they  were 
issued,  but  were  forced  into  an  inferior  position  by  the  notes 
of  the  Bank  of  France,  which  were  legal  tender  throughout 
the  republic.  The  circulation  of  the  bank-notes  of  Germany 
and  the  United  States  without  the  legal  tender  quality  might 
have  been  maintained  at  par  with  coin  (from  which  they  do 
not  seem  to  have  departed  in  Germany)  under  a  system  of 
closer  union  among  the  banks  and  prompter  means  of  com- 
munication. 

The  government  of  Prussia  took  action  as  early  as  1846 
towards  the  centralization  of  the  banking  system,  by  the 
ordinance  of  October  5th,  which  provided  that  the  provin- 
cial banks  of  the  Kingdom  should  cease  their  operations 
when  the  Bank  of  Prussia  should  lose  its  special  privileges. 
Another  act,  which  indicated  the  purpose  of  the  government 
to  keep  matters  in  its  own  hands,  was  the  law  of  May  7, 
1856,  renewing  the  privileges  of  the  Bank  of  Prussia,  but 
reserving  to  the  executive  power  the  right  at  the  end  of  1871 
and  every  ten  years  thereafter  to  dissolve  the  bank  and  re- 
turn the  capital  to  the  shareholders.  This  provision  neces- 
sarily exposed  the  other  banks,  under  the  ordinance  of  1846, 
to  dissolution  as  banks  of  issue  at  the  end  of  the  same  period. 
The  law  remained  in  this  condition  until  the  reorganization 
of  the  North  German  Confederation  under  the  headship  of 
Prussia  in  1867.  A  provision  was  then  incorporated  in  the 
constitution  of  North  Germany  confiding  to  the  Federal  As- 
sembly exclusively  the  regulation  of  banks  of  issue.  The 
power  remained  in  abeyance  for  a  few  years,  when  the  law 
of  March  27,  1870,  reserved  to  the  Confederation  the  right 
of  granting  the  power  of  issue  or  of  increasing  the  monetary 
circulation.  The  law  stipulated  that  the  renewal  of  the 
privilege  of  issue  should  not  henceforth  be  granted  except 
upon  the  condition  that  it  might  be  revoked  at  any  time 
upon  preliminary  notice  of  one  year.  It  was  also  provided 
that  where  a  bank  possessed  the  right  of  issue  for  a  definite 


196         HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

term,  subject  to  preliminary  notice  of  withdrawal,  this  notice 
should  be  regarded  as  having  been  given. 

The  monetary  system  of  Germany  called  for  radical  re- 
form, without  regard  to  the  banking  policy  adopted,  in  order 
to  facilitate  exchanges  among  the  German  states  and  with 
foreign  countries.  The  coins  were  of  such  different  denomi- 
nations and  degrees  of  abrasion  that  heavy  exchange  charges 
were  levied  on  the  borders  of  every  little  state  and  possible 
profits  on  merchandise  were  almost  neutralized  by  this  loss. 
Several  conventions  to  simplify  the  monetary  system  were 
held  before  the  unification  of  the  Kmpire,  one  of  the  latest  at 
Vienna  on  January  24,  1857.  The  basis  of  an  agreement 
was  then  prepared  abrogating  the  old  systems  and  adopting 
one  based  upon  the  new  pound  of  five  hundred  grams  which 
was  in  use  in  several  continental  countries.  Germany  was 
divided  by  this  convention  into  three  zones.  Silver  was 
treated  as  the  single  standard  of  value  and  was  to  be  coined 
into  two  forms, — the  thaler,  equivalent  to  a  florin  and  three- 
quarters,  and  the  florin,  worth  four-sevenths  of  a  thaler. 
It  was  proposed  to  coin  thirty  thalers  out  of  a  pound  of  five 
hundred  grams  of  fine  silver  for  use  in  the  Northern  States 
and  fifty-two  and  a  half  florins  out  of  a  pound  for  use  in  the 
South.  Other  silver  pieces  of  one  and  two  thalers  were  to 
be  coined  with  special  devices,  under  the  name  of  the  union 
thaler  (  Vereinthaler),  for  trade  between  North  and  South 
Germany,  and  were  to  be  received  by  public  depositories  as 
lawful  money. 

Silver  constituted  the  principal  metallic  stock  of  Germany 
and  of  the  cash  resources  of  the  local  banks  up  to  the  time 
of  the  monetary  reform.  Gold  figured  somewhat  in  the  cir- 
culation, but  it  was  not  a  legal  tender.1  The  gold  pieces, 
coined  under  the  convention  of  1857  according  to  mint  re- 


v J  Mr.  Shaw  declares  that  the  convention  in  1857  had  a  part  of  its 
motive  in  the  wish  by  the  German  States  "  to  protect  that  part  of 
their  currency  system  which  was  threatened  by  bimetallic  law,"  and 
that  France  drew  gold  from  Germany  as  well  as  from  California  and 
Australia  as  the  result  of  the  change  in  the  ratio.—  History  of  Cur- 
rency, 205-11. 


THE  BANKS  OF  GERMANY.  197 

gulations,  were  to  be  received  at  a  valuation  in  standard  sil- 
ver money  known  as  * '  the  bank  rate, ' '  which  was  fixed  in 
advance  for  six  months  and  was  never  to  be  higher  than  the 
mean  quotations  in  the  market.  The  character  of  the  circu- 
lating medium  was  further  complicated  by  a  circulation  of 
government  paper  money,  which  was  issued  by  every  Ger- 
man state  except  the  principality  of  I^ippe  and  the  three  free 
cities  of  Hamburg,  Bremen,  and  I^ubeck.  The  adoption  of 
the  gold  standard  was  first  formally  recommended  by  a  com- 
mercial convention  of  one  hundred  and  nineteen  German 
cities  which  sat  at  Berlin  between  October  20,  and  October 
23,  I868.1  A  resolution  was  presented  by  Dr.  Adolph  Soet- 
beer,  who  was  the  official  reporter  on  the  subject  of  the 
standard  at  an  earlier  session  held  in  September,  1865,  de- 
claring that  "a  monetary  unity,  and  at  the  same  time  such  a 
general  monetary  reform  as  befits  the  age,  can  be  brought 
about  by  the  adoption  simultaneously  by  all  the  German 
States  of  the  single  standard  with  full  application  of  the 
decimal  system,  in  pursuance  of  the  principles  recommended 
by  the  International  Monetary  Conference  of  Paris  in  its  re- 
port of  July  6,  1867."  This  resolution  was  adopted,  includ- 
ing the  recommendation  of  a  unit  of  value  equivalent  to  the 
gold  five-franc  piece,  and  the  public  authorities  were  recom- 
mended to  put  it  in  force  not  later  than  January  i,  1872,  when 
the  new  system  of  weights  and  measures  already  adopted  by 
the  North  German  Confederation  took  effect. 2 

The  payment  of  the  great  war  indemnity  by  France  gave 
Germany  the  opportunity  to  carry  out  the  recommendations 
of  her  leading  economists,  that  she  adopt  the  gold  standard. 
The  direct  payments  in  French  gold  were  only  273,003,058 
frarrcs  ($52,600,000),  but  the  power  given  the  German  gov- 
ernment to  draw  the  proceeds  of  bills  of  exchange  upon 
Ivondon  and  Paris  gave  them  access  in  a  large  measure  to  the 

1  Appendix  to  American  Report  on  International  Monetary  Confer- 
ence of  1878,  Sen.  Ex.  Doc.  58,  45th  Congress,  Third  Ses.,  727. 

2M.  Allard,  the  honorary  director  of  the  Belgian  mint,  declares  that 
silver  was  "  academically  demonetized  "  by  the  vote  of  the  Paris  Con- 
ference.— La  Crise  Agricole  et  Monetaire,  41. 


198          HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

gold  of  the  world.  The  German  government  kept  an  ac- 
count with  the  London  Joint-Stock  Bank  which  was  believed 
to  run  as  high  as  ^4,000,000  ($20,000,000)'  and  by  watching 
the  market  were  able  to  rapidly  carry  gold  into  Germany. 
The  law  establishing  a  uniform  coinage  (Act  of  December 
4,  1871)  did  not  adopt  the  five-franc  piece  as  the  unit,  as 
recommended  by  the  convention  of  1868,  but  adopted  a  unit 
called  the  mark,  equivalent  to  one-third  of  a  Prussian  thaler, 
and  established  the  ratio  of  fifteen  and  a  half  to  one  between 
gold  and  silver.  The  provision  of  the  treaty  of  Vienna, 
providing  for  the  coinage  of  the  union  thaler  of  silver,  was 
repealed.  Gold  legal  tender  coins  were  provided  for,  but  the 
Imperial  gold  standard  was  not  fully  established  until  the 
coinage  act  of  July  9,  1873,  when  it  superseded  all  local 
standai  "*  and  made  the  monetary  unit  the  mark  of  gold.2 
The  Imperial  silver  coinage  was  to  be  carried  on  on  govern- 
ment account,  and  limited  to  ten  marks  per  capita,  and  was  to 
be  a  legal  tender  for  only  twenty  marks  between  individuals, 
but  payable  in  any  sum  to  the  government.  The  new  sil- 
ver coins  were  made  mere  token  coins,  by  reducing  the  weight 
of  the  fine  silver  eleven  and  one-ninth  per  cent,  below  the 
full  weight  at  the  ratio  of  fifteen  and  a  half  to  one  and  coin- 
ing a  pound  of  fine  silver  into  one  hundred  marks  and  a 
pound  of  fine  gold  into  1395  marks. 

One  of  the  interesting  incidental  results  of  the  new  coinage 
laws  was  the  termination  of  the  career  of  the  old  Bank  of 
Hamburg,  which  had  for  more  than  two  and  a  half  centuries 
been  carried  on  on  the  principles  of  the  Bank  of  Venice  and 
the  Bank  of  Amsterdam.  The  accounts  of  the  bank  were 
kept  in  marks  banco,  representing  a  bank  credit  of  the  uni- 
form value  of  half  a  thaler  (37^  cents),  and  its  notes  were 
redeemable  in  silver.  The  Bank  of  Hamburg,  founded  in 
1619,  was  the  last  survivor  of  the  medieval  banks,  created 

1  Bagehot,  Lombard  Street,  Works,  V.,  199-202. 

2  The  exact  equivalent  of  the  mark  in  American  gold  coin  is  twenty- 
three  and  eight-tenths  cents,  but  for  convenience  of  computation  in 
dealing  with  large  figures  it  is  treated  in  this  work  as  substantially 
equal  to  a  quarter  of  a  dollar. 


THE  BANKS  OF  GERMANY.  199 

for  the  purposes  of  foreign  commerce.  Accounts  could  be 
opened  only  by  a  Hamburg  citizen  or  corporation  and  were 
transferred  only  upon  his  appearance  in  person  or  by  attor- 
ney with  a  transfer  order.  The  principle  upon  which  the 
bank  was  conducted  was  the  granting  of  a  credit  on  the 
books  for  the  silver  or  gold  deposited.  No  loans  were  made 
and  no  notes  or  other  liabilities  were  created  beyond  the 
amount  of  coin  and  bullion  on  deposit.  So  faithfully  was 
this  rule  adhered  to  that  when  the  French  on  November  5, 
1813,  took  possession  of  the  bank  they  found  7,506,956 
marks  in  silver  held  against  liabilities  of  7,489,343  marks. 
They  removed  a  large  part  of  the  treasure  before  the  free- 
dom of  Hamburg  was  re-established  on  June  i,  1814,  but  the 
bank  resumed  business  with  unimpaired  credit  and  the 
thefts  of  Napoleon's  forces  were  made  good  in  1816  by  a 
transfer  of  French  securities.  Modern  banking  methods 
were  gradually  introduced  into  the  Bank  of  Hamburg  and  a 
capital  was  accumulated  of  about  1,000,000  marks  ($250,000) 
in  addition  to  the  buildings.  The  bank  survived  the  storm 
of  the  crisis  of  1857,  on^y  to  fell  under  the  decrees  establish- 
ing the  new  German  monetary  system,  which  ordered  the 
bank  to  liquidate  its  accounts  in  fine  silver  by  February  15, 
1873.  The  latest  reference  to  its  existence  is  found  in  the 
proceedings  of  the  Hamburg  Senate  on  October  13,  1875, 
declaring  their  purpose  to  sell  to  the  Bank  of  Germany  for 
900,000  marks  the  buildings  of  "  the  venerable  institution 
which  had  performed  such  great  services  to  German  trade. ' '  * 
The  accumulation  of  a  stock  of  gold  was  begun  by  the  Im- 
perial Bank  and  the  government,  and  the  purchases  of  gold 
by  the  bank,  from  January  i,  1876,  to  the  end  of  1893, 
amounted  in  American  money  to  $434,890,067.  The  coin- 
age of  Imperial  gold  coins  from  1872  to  the  close  of  1893 
reached  2,737,790,915  marks  and  the  aggregate  coinage  of 
silver  484,048,609  marks.  The  sales  of  silver  by  the  govern- 
ment up  to  March  31,  1893,  represented  a  coining  value  of 
672,862,729  marks,  but  the  amount  actually  received  was 


Palgrave,  Dictionary  of  Political  Economy,  I.,  105. 


200         HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

574,055,532  marks,  showing  a  loss  of  98,807,197  marks.1 
The  bulk  of  the  sales  were  made  before  May  16,  1878,  before 
the  great  decline  in  the  price  of  silver,  and  the  highest  price 
per  kilogram  was  obtained  in  the  period  of  the  largest  sales, 
between  September  30,  1876,  and  September  30,  i877.a  The 
profit  on  the  gold,  silver,  and  subsidiary  coinage,  taking 
these  coins  at  their  face  value,  was  96,380,330  marks,  and 
the  cost  of  recoinage  added  to  the  loss  on  silver  was  127,894,- 
218  marks,  showing  a  net  loss  of  31,513,888  marks. 

The  banking  system  of  the  Empire  was  unified  in  a  meas- 
ure by  the  provisions  of  the  law  of  July  9,  1873,  that  bank 
bills  should  be  withdrawn  from  circulation  before  January  i , 
1876,  if  their  value  was  not  declared  in  Imperial  marks,  and 
that  the  smallest  notes  should  be  for  100  marks  ($23.80). 
The  work  of  unification  was  completed,  so  far  as  it  was 
possible  to  complete  it,  by  the  Imperial  law  of  March  14, 
*875,  which  was  supplemented  by  the  Prussian  law  of 
March  27th  and  a  convention  between  Prussia  and  the  Em- 
pire on  May  i7th  and  i8th  following.  The  Royal  Bank  of 
Prussia  was  directed  to  cease  its  operations  on  December  31, 
1875,  and  to  transfer  its  rights  and  privileges  to  a  new  bank, 
known  as  the  Bank  of  the  Empire  (Reichsbank).  The  gov- 
ernment of  Prussia  was  allowed  to  withdraw  its  capital  of 
1,906,800  thalers  in  the  old  institution  and  the  half  of  the 
reserve  fund  belonging  to  it.  The  Prussian  government  was 
further  compensated  for  the  surrender  of  its  rights  in  the 
bank  by  an  indemnity  of  15,000,000  marks  ($3,750,000), 
paid  from  the  Treasury  of  the  Empire,  and  a  pledge  that 

1  The  equivalent  for  these  sums  in  American  money,  as  given  in 
the  American  translation  of  the  Report  of  the  Berlin  Silver  Commis- 
sion of  1894,  are  :  Gold  coinage,  $651,594,221  ;  silver  coinage,  $115,- 
203,549  ;  face  value  of  silver  coins  sold,  $160,141,329  ;  price  received, 
$136,625,216;   loss  on   sales,   $23,516,113;    net  loss  after  deducting 
profits,  $7,500,308.— Sen.  Mis.  Doc.  274,  pt.  I.,  Fifty-third  Congress, 
Second  Session,  33-36. 

2  The  sales  during  this  period  were  not  far  short  of  half  of  the 
whole,  being  1680.4  kilograms  and  representing  a  face  value  of  302,- 
500,000  marks.     The  average  price  of  silver  in  1876  was  $1.156  per 
ounce  and  in  1877,  $1.201  per  ounce. 


THE  BANKS  OF  GERMANY.  2OI 

the  new  bank  should  continue  the  annual  payment  of  621,- 
910  thalers  ($465,000)  from  1876  to  1925  which  had  been 
agreed  upon  by  the  Bank  of  Prussia  in  I856.1  The  Imperial 
government  agreed  to  be  responsible  for  this  annuity  in  case 
the  privileges  of  the  bank  were  not  continued.  The  share- 
holders of  the  Bank  of  Prussia  were  given  the  option  of 
receiving  back  their  capital  in  cash,  in  accordance  with  the 
pledge  of  the  Prussian  law  of  October  5,  1846,  or  receiving 
shares  of  equal  face  value  with  their  existing  holdings  in  the 
new  Imperial  Bank.  The  new  bank  on  these  conditions 
succeeded  to  all  the  rights  and  obligations  of  the  Bank  of 
Prussia.  The  Chancellor  of  the  Empire  was  authorized  to 
acquire  the  bank  shares  which  should  be  exchanged  for  the 
shares  of  the  Bank  of  Prussia  and  to  issue  interest-bearing 
Treasury  bonds  maturing  not  later  than  May  i,  1876,  to  the 
amount  of  the  shares  not  issued,  in  order  to  complete  the 
capital  of  the  new  institution.  The  capital  was  fixed  by  law 
at  120,000,000  marks  and  was  divided  into  40,000  shares  of 
3000  marks  ($750)  each,  of  which  19,919  shares  replaced  the 
shares  of  the  Bank  of  Prussia  which  the  holders  had  chosen 
to  convert ;  20,000  shares  were  placed  by  public  subscrip- 
tion, and  81  by  means  of  sales  on  the  Bourse. 

The  organization  of  the  Imperial  Bank  made  it  entirely  a 
private  institution  as  to  ownership,  but  essentially  a  public 
one  in  its  management.  "  In  fact,"  says  M.  Octave  Noel, 
11  the  establishment  is  closely  bound  to  the  state  and  is  only 
able  to  move,  think  or  act  when  the  state  manifests  in  some 
manner  its  presence  and  affirms  its  control."  The  official 
control  over  the  bank  is  confided  to  a  council  of  curators, 
composed  of  the  Chancellor  of  the  Empire,  who  is  President, 
and  four  other  members,  one  named  by  the  Emperor  and  the 
other  three  by  the  Federal  Council.  The  direction  of  the 
policy  of  the  bank  is  so  completely  under  the  orders  of  the 
Chancellor  that  in  case  of  his  absence  or  impeachment  the 
presidency  of  the  Council  is  vested  temporarily  in  an  official 
named  by  the  Emperor.  The  Chancellor  or  his  substitute 


Noel,  I.,  248. 


202  HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

directs  the  entire  administration  and  issues  the  instructions 
to  the  council  of  direction,  to  the  branches  and  to  the  em- 
ployees of  the  bank.  The  committee  of  curators  meet  every 
three  months  and  examine  reports  regarding  the  bank's 
condition  and  the  operations  which  are  being  carried  on. 
The  administrative  authority  is  vested  in  a  directorate  com- 
posed of  a  president  and  a  number  of  members  named  for 
life  by  the  Imperial  government  upon  the  nomination  of  the 
Federal  Council.  The  official  force  of  the  bank,  although 
paid  from  the  funds  of  the  institution,  are  subject  to  the 
same  obligations  and  enjoy  the  same  privileges  as  the  public 
employees  of  the  Bmpire.  Honors  and  pensions  are  ac- 
corded them,  benefits  are  voted  to  the  families  of  deceased 
employees,  the  number  of  posts  and  the  salaries  are  included 
in  the  Imperial  budget,  and  the  accounts  are  subject  to  the 
control  of  the  accounting  officers  of  the  Empire.  The  em- 
ployees of  the  bank,  moreover,  are  forbidden  by  law  to  hold 
stock  in  the  institution. 

The  influence  of  the  private  owners  is  exerted  through  a 
central  commission  of  fifteen  members  and  fifteen  alternates, 
elected  by  the  general  assembly  of  the  shareholders  from 
their  own  numbers.  These  commissioners  are  required  to 
possess  in  their  own  right  not  less  than  three  shares,  to  have 
their  domicile  within  the  Empire,  and  nine  members  and  nine 
alternates  are  required  to  be  residents  of  Berlin.  A  third 
of  the  board  is  elected  every  year  and  the  members  are 
eligible  for  re-election.  Many  of  the  business  details  of  the 
management  of  the  bank  are  remitted  to  this  central  com- 
mission, so  long  as  their  course  does  not  meet  the  disap- 
proval of  the  Imperial  authorities.  They  are  required  to 
examine  at  least  each  month  the  weekly  reports,  to  inspect 
the  deposit  accounts,  and  to  determine  what  proportion  of 
the  bank  funds  shall  be  used  in  advances  and  in  the  purchase 
of  paper,  what  the  rate  of  discount  shall  be,  and  what  ar- 
rangements shall  be  made  with  other  German  banks.  A 
still  smaller  body  of  three  members  of  the  central  commis- 
sion is  charged  with  the  daily  supervision  of  the  bank's  af- 


THE  BANKS  OF  GERMANY.  2O3 

fairs  and  they  are  authorized  to  sit  at  all  meetings  of  the 
directorate  with  consulting  powers. 

The  note  circulation  of  the  Imperial  Bank  is  based  largely 
upon  the  English  banking  act  of  1844,  but  with  an  impor- 
tant modification  which  adds  greatly  to  the  ability  of  the 
bank  to  provide  accommodation  in  times  of  stringency. 
There  is  a  fixed  limit  of  authorized  circulation,  against  which 
cash  or  its  equivalent  must  be  held  in  the  proportion  of  one- 
third,  and  issues  beyond  this  limit  must  be  covered  in  cash 
for  the  full  amount.  The  cash  reserve  of  one- third  in  the 
one  case  and  one  hundred  per  cent,  in  the  other  may  consist 
of  money  having  currency  in  Germany,  Imperial  Treasury 
bonds,  gold  bullion,  or  foreign  gold  coin.  The  notes,  there- 
fore, are  issued  against  the  general  assets  of  the  bank,  which 
remain  wholly  within  its  own  control  and  are  not  set  aside 
by  specific  designation  or  prior  lien  for  the  security  of  the 
note  holders.  The  law,  says  Prof.  Dun  bar,  ' '  has  simply 
provided  by  suitable  measures  that  the  affairs  of  the  bank, 
including  its  issue  of  notes  and  the  money  and  securities 
held  by  it,  shall  meet  certain  tests  of  soundness,  believing 
that  both  the  ultimate  solvency  of  the  bank  and  the  prompt 
payment  of  its  circulation  are  thus  made  secure."1  The 
limit  of  authorized  circulation  was  fixed  by  the  law  of  March 
14,  1875,  at  250,000,000  marks  ($60,000,000)  but  the  same 
law  provided  that  when  any  existing  bank  of  circulation 
should  surrender  its  right,  either  by  liquidation  or  by  refusal 
to  accept  the  conditions  imposed  by  the  new  law,  the  amount 
of  the  circulation  might  be  assumed  by  the  Imperial  Bank. 
Seventeen  banks  surrendered  their  right  to  issue  notes  soon 
after  the  adoption  of  the  new  system  and  their  action  added 
26,085,000  marks  to  the  authorized  circulation  of  the  Im- 
perial Bank.  This  was  afterwards  increased  to  42,117,000 
marks. a  The  two- thirds  of  the  authorized  circulation  not 
covered  by  the  cash  reserve  are  required  to  be  covered  by 


1  Theory  and  History  of  Banking,  195. 

2  RafFalovich,  Marche  Financier  en  1893-4.,  67. 


204         HISTOR  Y  OF  MODERN  BANKS  OF  ISSUE. 

bills  of  exchange  maturing  in  not  more  than  three  months 
and  bearing  not  less  than  two  solvent  names. 

The  novel  feature  of  the  German  system  of  circulation  is 
the  authority  given  to  the  Imperial  Bank  to  exceed  the  statu- 
tory limit  of  note  issue  without  metallic  security,  upon  the 
payment  of  a  tax  at  the  rate  of  five  per  cent,  per  year  upon 
the  excess  of  circulation.  Weekly  reports  are  required  by 
the  government  and  upon  the  excess  of  circulation  shown 
above  the  limit  a  tax  of  -fg  per  cent,  is  at  once  assessed,  rep- 
resenting approximately  the  tax  for  a  single  week  at  the  rate 
of  five  per  cent,  a  year.  This  provision  permits  increased 
issues  when  there  is  stringency  enough  in  the  money  market 
to  carry  current  discount  rates  above  five  per  cent,  but  drives 
the  new  notes  promptly  out  of  circulation  when  the  discount 
rate  falls.  The  operation  of  the  rule,  which  has  been  several 
times  availed  of  by  the  Imperial  Bank  and  by  other  German 
banks,  has  proved  salutary  in  averting  such  stringency  as 
has  been  felt  in  England  under  the  Act  of  1844,  while  it  has 
kept  the  circulation  within  the  limits  set  by  the  needs  of 
business.1 

The  local  banks  of  Germany  were  brought  by  the  law  of 
1875  under  the  same  rules  as  the  Imperial  Bank  and  drastic 
regulations  were  enforced  to  compel  them  to  comply  with  the 
new  law  or  abandon  the  issue  of  circulating  notes.  The 
purpose  of  the  new  legislation,  to  bring  the  control  of  the 
bank-note  circulation  as  soon  as  practicable  into  the  hands 
of  the  Imperial  Bank,  was  indicated  by  the  declaration  that 
the  power  to  issue  bank-notes  or  to  increase  circulation  be- 
yond the  limit  already  authorized  by  the  various  states  should 
be  granted  only  by  a  law  of  the  Empire.  Prussia  was  almost 
supreme  in  the  Federal  Council  and  there  was  little  likelihood 
that  she  would  consent  to  any  law  increasing  the  circulation 
of  the  local  banks.  The  long  duration  of  the  privilege  ac- 
corded to  some  of  them  was  cut  off  by  a  provision  that  their 
privileges  should  be  subject  to  revocation  on  January  I,  1891, 


1  The  example  of  Germany  was  followed  in  this  provision  by  Austria- 
Hungary  and  Japan  in  the  revision  of  their  bank  charters. 


THE  BANKS  OF  GERMANY.  2O$ 

and  every  tenth  year  thereafter,  upon  one  year's  notice  and 
without  indemnity,  if  they  accepted  the  power  of  note  issue 
involved  in  the  new  law.  Those  banks  which  were  not  dis- 
posed to  accept  the  new  conditions  were  dealt  with  in  a  man- 
ner similar  to  the  departmental  banks  of  France  after  the 
revolution  of  1848.  They  were  not  deprived  of  the  privilege 
of  issuing  notes,  but  they  were  forbidden  by  Article  42  of  the 
law  to  carry  on  banking  operations,  outside  the  limits  of  the 
state  which  had  given  them  the  privilege,  by  means  of 
branches  or  agents  or  to  hold  shares  in  other  banks.  An- 
other provision  (Article  43)  declared  that  "The  notes  of 
banks  having  the  privilege  of  note  issue  at  the  time  of  the 
promulgation  of  this  law,  shall  not  be  employed  in  payments 
outside  the  state  which  may  have  granted  them  the  privilege. 
The  exchange  of  these  notes,  however,  for  other  bank-notes, 
paper  money,  or  specie  is  not  subject  to  this  prohibition." 

Banks  which  saw  fit  to  submit  to  the  new  conditions  were 
treated  somewhat  more  favorably,  pending  the  extension  of 
the  branches  of  the  Imperial  Bank  throughout  the  Empire. 
They  were  governed  by  Article  44  of  the  law  and  were  sub- 
ject to  the  same  conditions,  as  to  the  classes  of  securities 
dealt  in,  the  character  of  the  commercial  paper  held,  the 
proportion  of  cash  reserve  to  circulation  and  the  payment  of 
benefits  to  the  state,  as  the  Imperial  Bank.  They  were  re- 
quired to  hold  security  for  their  circulation  to  the  amount  of 
one-third  in  money  having  currency  in  Germany,  in  Imperial 
Treasury  bonds,  in  gold  bullion  or  foreign  gold  coin.  The 
remaining  two-thirds  of  the  circulation  was  required  to  be 
protected  by  bills  of  exchange  running  for  not  more  than 
three  months  and  bearing  three  endorsements  or  not  less  than 
two  names  of  well-known  solvency.  They  were  required  to 
exchange  their  notes  for  German  money  having  currency  at 
Berlin,  or  Frankfort,  and  redemption  must  not  be  delayed 
beyond  the  morrow  of  the  presentation  of  the  note. *  Banks 
accepting  these  conditions  obligated  themselves  to  receive  at 
their  face  value,  in  branches  established  in  cities  of  more 


1  Noel,  I.,  320-23. 


206         HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

than  eighty  thousand  inhabitants  and  at  the  parent  bank 
the  notes  of  German  banks  whose  circulation  was  authorized 
throughout  the  Empire  and  which  were  redeemable  in  coin 
on  demand.  Bills  on  one  bank  thus  received  by  another 
could  be  used  only  in  the  settlement  of  balances  with  the 
bank  of  issue,  employed  in  payments  within  the  territory  of 
the  issuing  bank  or  presented  for  redemption.  Banks  de- 
siring to  conform  to  the  requirements  of  Article  44  were  re- 
quired to  present  to  the  Chancellor  of  the  Empire  the  evidence 
that  their  statutes  conformed  to  the  law  and  that  the  locality 
chosen  for  the  exchange  of  bills  (Berlin  or  Frankfort)  pos- 
essed  a  branch  ready  for  actual  operation. 

Much  feeling  was  aroused  among  the  German  banks  upon 
the  passage  of  this  law  and  fifteen  of  the  thirty-two  outside 
the  Bank  of  Prussia  promptly  abandoned  their  right  to  cir- 
culation, and  became  mere  private  banks  of  discount  and 
deposit,  rather  than  conform  to  all  the  requirements  of  the 
new  law.  The  Bank  of  Brunswick  took  the  bolder  course, 
which  it  was  believed  no  bank  would  be  able  to  maintain, 
of  refusing  to  comply  with  Article  44  and  continuing  its  cir- 
culation under  the  limitations  of  Articles  42  and  43.  The 
Bank  of  Brunswick,  therefore,  continued  to  issue  bills  which 
circulated  within  the  limits  of  the  duchy  and  braved  the  ef- 
forts of  the  Bank  of  Prussia  to  force  it  into  submission.  The 
Prussian  Bank  refused  to  receive  the  paper  of  the  Bank  of 
Brunswick  and  upon  the  failure  of  this  device  had  orders 
issued  to  the  postal  savings  banks  not  to  receive  the  notes 
of  the  bank  on  deposit.  The  latter  measure  threatened  to 
arouse  so  much  of  the  old  separatist  feeling  in  Germany  that 
it  was  abandoned  by  direction  of  the  Chancellor.  Frederick 
William  of  Brunswick  died  during  the  latter  part  of  1884, 
and  Prince  Albert  of  Prussia,  the  nephew  of  the  German 
Emperor,  was  elected  Duke  of  Brunswick  by  the  Diet  on 
October  21,  1885.  The  close  relations  thus  established  be- 
tween Brunswick  and  the  Imperial  government  soon  led  to 
the  compliance  of  the  Bank  of  Brunswick  with  the  provi- 
sions of  Article  44. 

The  purpose  to  clear  the  field  for  the  circulation  of  the  Im- 


THE  BANKS  OF  GERMANY.  207 

perial  Bank  was  indicated  by  a  law  of  April  30,  1874,  which 
required  the  retirement  of  the  paper  money  issued  by  the 
various  states  not  later  than  July  i,  1875.  The  Imperial 
government,  in  order  to  promote  this  policy,  was  authorized 
to  issue  Treasury  bonds  to  the  amount  of  120,000,000  marks 
($30,000,000)  and  to  apportion  them  among  the  states  ac- 
cording to  population.  The  paper  money  in  circulation  was 
61,374,599  thalers  ($45,000,000),  and  it  was  not  distributed  in 
any  such  even  ratio  as  the  new  bonds.  The  law,  in  contem- 
plation of  this  situation,  authorized  the  Imperial  Treasury  to 
advance  to  states  which  needed  an  additional  allowance 
to  retire  their  paper  money  a  sum  in  Treasury  bonds  equal 
to  two-thirds  of  the  excess  of  notes  above  the  original  ap- 
portionment of  bonds.  These  bonds  were  to  be  receivable 
by  the  Imperial  Treasury  and  were  to  be  convertible  on 
demand  into  metallic  money.  The  advances  of  bonds  in 
addition  to  the  apportionment  of  120,000,000  marks,  were 
54,919,941  marks,  of  which  Saxony  received  19,013,441 
marks ;  Bavaria,  14,534,975  marks ;  Baden,  4,577,449 
marks;  Wurtemberg,  3,309,651  marks;  Hesse,  3,250,- 
514  marks;  and  the  other  states  less  than  2,000,000  marks 
each.  Prussia  received  no  additional  advance,  but  her  share 
of  the  original  allotment  was  72, 145,494  marks.  Oldenburg, 
Lippe,  Lubeck,  Bremen,  Hamburg,  and  Alsace-Lorraine 
received  no  extra  advance. 

The  sixteen  banks  which  decided  in  1875  to  accept  the 
federal  regulation  of  their  circulation  and  to  continue  to 
issue  notes  were,  besides  the  Imperial  Bank  and  the  Bank 
of  Brunswick,  the  Municipal  Bank  of  Breslau,  and  the 
banks  of  Magdeburg,  Dantzig,  the  Grand  Duchy  of  Posen, 
Hanover,  Frankfort,  Bavaria,  Saxony,  United  Deposits  at 
Leipzig,  Chemnitz,  Wurtemberg,  Baden,  Southern  Ger- 
many, and  Bremen.  Provision  was  made  in  the  new  law 
for  a  new  bank  in  Bavaria,  with  which  two  existing  banks 
were  consolidated,  and  which  was  given  special  permission 
to  issue  circulating  notes  to  the  amount  of  70, 000,000  marks. 
The  authorized  uncovered  circulation  of  these  sixteen  banks 
was  111,125,000  marks,  of  which  the  Bank  of  Bavaria  was 


208 


HISTOR  Y  OF  MODERN  BANKS  OF  ISSUE. 


originally  entitled  to  32,000,000  marks,  the  Bank  of  Saxony 
at  Dresden  to  16,771,000  marks,  the  banks  of  Frankfort, 
Baden,  Wurtemberg,  and  of  Southern  Germany  to  10,000,- 
ooo  marks  each,  and  the  others  to  smaller  amounts.  The 
absorption  of  the  issues  of  these  banks  by  the  Imperial  Bank 
has  proceeded  rapidly  in  recent  years.  Only  eight  banks  of 
circulation  remained  in  existence  in  Germany  at  the  close  of 
1891,  outside  the  Imperial  Bank.  They  included  the  larger 
of  the  banks  named  above,  and  their  aggregate  capital  was 
130,000,000  marks  ($32,000,000).  The  circulation  of  the 
local  banks  fell  from  200,300,000  marks  ($50,000,000)  in 
1883  to  192,400,000  marks  in  1890,  but  their  metallic  reserve 
increased  from  111,200,000  marks  to  112,600,000  marks.1 
Four  more  banks  surrendered  the  right  of  note  issue  within 
the  next  sixteen  years,  and  at  the  beginning  of  1908  only  the 
following  institutions  remained  as  competitors  in  this  field 
with  the  Imperial  Bank  :  Bank  of  Bavaria,  with  an  author- 
ized issue  of  32,000,000  marks  ;  Bank  of  Saxony,  16,771,000 
marks  ;  Bank  of  Baden,  10,000,000  marks  ;  Bank  of  Wurtem- 
berg, 10,000,000  marks. 

The  principal  items  in  the  accounts  of  the  Imperial  Bank 
since  its  creation  are  shown  in  the  following  table 2 : 

THE  IMPERIAL  BANK  OF  GERMANY 


YBAK. 

MEAN 
CIRCULATION. 

MEAN 
METALLIC 
RESERVE. 

MEAN 
DISCOUNTS. 

MEAN 
ADVANCES. 

DEPOSITS, 
CURRENT 
ACCOUNTS,  ETC. 

(In  millions  of  marks.) 

1876 

684.8 

510.5 

402.9 

50.9 

218.7 

1878 

622.6 

494.0 

340-8 

52.4 

184.6 

1880 

735-0 

562.0 

345-7 

51-3 

185.4 

1882 

747-0 

548.9 

372.1 

54-4 

T7I.6 

1884 

732-9 

591-7 

377-7 

49-1 

222.9 

1885 

727.4 

586.1 

372.7 

52.4 

235-6 

1888 

933-o 

903.4 

430.8 

52.0 

381.8 

l8gO 

983-8 

801.0 

543-1 

98.0 

361.4 

l8Q2 

984.7 

942.0 

541.7 

95-0 

5II.8 

I894 

1,000.0 

934.3 

547-4 

81.0 

492.3 

^Bulletin  de  Statistique,  Nov.,  1891,  XXX.,  542. 
2  These  figures  down  to  1900  are  taken  from  Die  Reichsbank,  1876- 
1900,  268,  seq. 


THE  BANKS  OF  GERMANY. 


209 


THE  IMPERIAL  BANK  OF  GERMANY— (Continued.} 


YEAR. 

MEAN 
CIRCULATION. 

MEAN 
METALLIC 
RESERVE. 

MEAN 
DISCOUNTS. 

MEAN 
ADVANCES. 

DEPOSITS, 
CURRENT 
ACCOUNTS,  ETC. 

(In  millions  of  marks.) 

1895 

,095-5 

1,011.7 

573-9 

83.2 

499-5 

I8Q6 

,083.4 

891.9 

646.3 

106.0 

484.2 

I898 

,124-5 

850.9 

713.8 

96.4 

474.6 

1900 

,138.5 

8I7.I 

SOO.I 

80.0 

512.7 

IgOI 

,I9O.2 

911.4 

845.3 

72.8 

596.5 

1902 

,229.6 

982.2 

775-5 

74.1 

576.5 

1903 

,248.7 

904.9 

845.7 

74-8 

553-6 

1904 

,288.4 

926.6 

823.3 

74-2 

534-6 

1905 

,335-6 

972.9 

875-7 

72.0 

585.2 

1906 

1,387.0 

890.9 

989.4 

83.6 

575-6 

1907 

1,478.7 

843.3 

1,104.0 

98.0 

577-9 

1908  1 

1,792.6 

1,031.8 

1,127.0 

164.0 

615.1 

The  first  issues  of  the  Imperial  Bank  subject  to  the  five 
per  cent,  tax  occurred  in  December,  1881,  and  were  repeated 
in  September  and  October,  1882;  in  December,  1886;  and 
three  times  in  the  latter  part  of  1889,  when  the  excess  above 
the  limit  ran  as  high  as  109,477,500  marks  ($26,000,000). 
The  limit  was  exceeded  in  1890  by  26,250,000  marks  ($6,500,- 
ooo),  but  at  the  end  of  1891  the  reserve  had  been  so  increased 
that  the  note  issues  were  101,407,000  marks  below  the  limit. 
This  margin  was  reduced  to  16,764,000  marks  ($4,000,000) 
at  the  end  of  1892,  but  there  was  only  one  week  of  excess 
issues  in  1893,  none  in  1894,  an<^  three  weeks  in  1895. 

New  conditions  began  to  develop  with  the  expansion  of 
German  trade  in  1896.  The  number  of  weeks  in  which 
taxes  were  paid  in  that  year  was  six;  in  1897,  nine;  in  1898, 
sixteen;  in  1899,  twenty;  and  in  1900,  twenty.  The  amount 
paid  in  taxes  on  this  excess  circulation,  which  had  never 
been  higher  than  338,627  marks  ($81,000)  before  1896,  at- 
tained 464,801  marks  in  that  year;  767,916  marks  in  1897; 
1,927,401  marks  in  1898;  2,847,294  marks  in  1899;  and 
2»5I7>853  marks  in  1900,  making  total  payments  in  five 
years  of  8,525,265  marks  ($2,025,000).  The  reason  for  this 
was  not  found  in  any  special  pressure  in  the  market  for 


1  June  30. 
14 


210         HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

capital,  except  perhaps  in  1900,  but  in  the  fact  that  the 
growth  of  business  in  Germany  required  a  larger  volume 
of  circulating  medium. 

In  the  revision  of  the  charter  of  the  bank  by  the  law  of 
June  7,  1899,  the  new  conditions  were  recognized.  The 
government  proposed  an  increase  in  the  authorized  un- 
covered circulation  to  400,000,000  marks,  and  this  limit  was 
raised  by  the  Reichstag  to  450,000,000  marks  ($107,000,000). 
Soon  after  these  limits  became  effective,  on  January  i,  1901, 
the  Frankfort  Bank  (in  March,  1901)  and  the  Bank  of  South 
Germany  (in  June,  1902)  surrendered  their  fixed  issues  of 
10,000,000  each  to  the  Imperial  Bank,  and  in  1906  a  third 
institution,  raising  its  total  authorized  or  "  uncovered  "  issue 
to  472,829,000  marks  ($112,500,000). 

The  object  of  this  elevation  of  the  limit  of  authorized 
circulation  was  to  avoid  imposing  an  unwarranted  burden 
of  taxation  upon  the  circulation  when  it  was  only  at  the 
amount  required  by  normal  conditions.  The  effect  was  re- 
flected in  the  statement  of  excess  issues  as  soon  as  the  new 
limit  took  effect,  which  was  at  the  beginning  of  1901.  The 
limit  of  untaxed  circulation  was  exceeded  during  only  five 
weeks  in  that  year;  three  weeks  in  1902;  seven  weeks  in 
1903;  eight  weeks  in  1904;  nine  weeks  in  1905;  and  seven- 
teen weeks  in  1906.  The  amount  of  tax  paid  was  only 
352,684  marks  ($83,800)  in  1901,  and  prior  to  the  pressure 
of  1907  reached  a  maximum  under  the  new  order  of  things 
of  3,692,350  marks  ($880,000)  in  1906. 

The  highest  amount  attained  by  the  excess  circulation 
prior  to  the  operation  of  the  new  limit  was  371,233,061 
marks  in  the  week  ending  September  30,  1899.  It  was  this 
September  week  of  the  autumn  crop  movement  and  the  close 
of  the  financial  quarter  which  almost  invariably  showed  the 
largest  issues.  Even  the  outbreak  of  the  war  between  Russia 
and  Japan  in  1904,  which  caused  a  temporary  panic  on  the 
bourses  of  Berlin  and  Paris,  did  not  compel  the  issue  of  any 
taxed  circulation  until  the  quarter-end  on  March  3ist,  when 
the  amount  was  166,126,902  marks,  while  the  limit  reached 
on  September  30th,  after  the  peace,  was  305,038,527  marks, 


THE  BANKS  OF  GERMANY.  211 

and  the  maximum  of  1905  on  the  same  date  was  450,282,987 
marks  ($107,000,000).' 

The  crisis  of  1907,  however,  subjected  the  Imperial  Bank 
to  a  severe  test,  for  the  pressure  felt  in  Germany  was  not 
merely  a  reflex  of  that  in  the  United  States,  but  was  due 
also  to  speculation  and  excessive  demands  for  capital  at 
home.  Not  only  was  the  discount  rate  of  the  bank  kept 
at  seven  and  a  half  per  cent,  from  November  8,  1907,  to 
January  15,  1908,  but  remained  at  six  per  cent,  until  March 
yth,  and  at  five  per  cent,  far  into  the  summer,  after  the  Bank 
of  England  rate  had  fallen  to  two  and  a  half  per  cent.  Even 
these  high  rates  barely  kept  the  gold  reserve  intact,  and 
caused  doubts  to  spread  of  the  wisdom  of  the  law  imposing 
the  tax  of  five  per  cent,  on  the  uncovered  circulation  above 
the  legal  limit.  The  annual  report  for  1907  showed  that  the 
average  metallic  reserve  of  the  year  had  shrunk  to  843,340,000 
marks  ($200,300,000)  as  compared  with  890,965,000  marks 
in  1906  and  972,959,000  marks  in  1905.  Even  this  degree  of 
security  had  been  maintained  only  at  heavy  cost.  The  aver- 
age discount  rate  of  1907  had  been  6.033  per  cent. ;  circulation 
subject  to  the  special  tax  had  been  outstanding  twenty-five 
weeks,  or  for  practically  half  the  year ;  the  week  of  Decem- 
ber 3ist  witnessed  an  excess  circulation  of  625,974,363  marks 
($149,000,000);  and  the  tax  paid  for  the  year  amounted  to 
5,600,698  marks  ($i, 350,000). a 

If  the  burden  had  fallen  chiefly  upon  the  bank,  it  would 
have  been  viewed  with  equanimity  by  many  elements  in  the 
community,  but  the  tax  imposed  upon  commerce  was  so 
heavy  that  severe  criticisms  of  the  bank  and  the  government 
were  heard  in  the  Reichstag,  which  went  so  far  as  to  demand 
a  modification  of  the  gold  standard  and  the  payment  of  silver 
for  notes  in  order  * '  to  put  a  silver  wall  around  the  gold 


1  Raffalovich,  Le  Marche  Financier  en  1905-1906,  428. 

8  Bulletin  de  Statistique,  April,  1908,  LXIIL,  476.  It  was  hinted 
by  the  Russian  Minister  of  Finance  that  the  German  bank  was 
compelled  to  appeal  to  Russia  for  a  loan  of  gold. — London  Statist, 
January  n,  1908,  LXI.,  76. 


212          HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

treasure. ' ' '  While  the  new  governor  of  the  bank,  Herr 
Havenstein,8  declared  it  to  be  his  unalterable  purpose  to 
maintain  the  gold  standard,  the  government  felt  compelled 
to  take  several  measures  to  allay  the  growing  uneasiness. 
One  of  these  was  the  appointment  of  a  commission,  chosen 
from  among  economists  and  representatives  of  the  commercial 
classes,  to  examine  into  questions  relating  to  the  extension 
of  the  bank  charter,  the  increase  of  the  limit  of  untaxed 
issues,  the  extension  of  the  check  and  clearing  system,  and 
the  methods  of  drawing  gold  into  the  bank  from  abroad 
and  from  the  domestic  circulation. s  Other  measures  were 
the  enactment  of  a  code  governing  the  use  of  checks  and 
the  increase  of  the  per  capita  stock  of  subsidiary  silver-. 
Already  the  bank,  under  the  sanction  of  a  law  of  February 
20, 1906,  had  begun  the  issue  of  notes  for  fifty  marks  ($11.90) 
and  twenty  marks  ($4.76),  in  order  to  draw  into  the  vaults 
of  the  bank  an  equivalent  amount  of  gold. 4  Of  these  new 
notes  139,286,100  marks  of  the  larger  denomination  and 
151,157,180  marks  of  the  smaller  were  already  in  circulation 
at  the  close  of  1907. b 

The  rate  of  discount  charged  by  the  Bank  of  Germany, 
including  its  earlier  career  as  the  Bank  of  Prussia,  averaged 
barely  over  four  and  a  quarter  per  cent,  from  1845  to  1900. 
The  highest  average  for  a  decade  was  4.60  per  cent.,  from 
1865  to  1874,  —  the  period  of  the  wars  with  Austria  and 
France, — and  the  lowest  was  3.65  per  cent.,  from  1885  to 
1894.  These  averages,  however,  do  not  represent  the  ex- 
treme fluctuations.  The  rate  of  nine  per  cent,  prevailed 


1  fcconomisle  Europeen,  Jan.  17,  1908,  XXXIII.,  69. 

2  The  new  governor  in  January,  1908,  succeeded  Dr.  Koch  who, 
after  passing  through  various  grades  in  the  old  Bank  of  Prussia  and 
the  Imperial  Bank,   had  been  governor  of  the  latter  since  1890. — 
London  Statist.,  December  14,  1907,  LX. 

3  London  Economist,  January  18,  1908,  LXVI.,  122.    The  first  sitting 
of  the  commission   was   on  May    i,  1908.  — Moniteur  des  InterHs 
Matcriels,  May  5,  1908,  1492. 

4  Bulletin  de  Statistique,  February,  1906,  LJX.,  178. 

5  Ibid.,  April,  1908,  LXIIL,  178. 


THE  BANKS  OF  GERMANY.  21$ 

for  sixty-three  days  in  1866,  and  eight  per  cent,  for  five  days 
in  1866,  and  thirty -two  days  in  1870.'  Apart  from  these 
instances,  there  was  no  higher  rate  than  seven  per  cent, 
after  1866,  until  the  crisis  of  1907.  The  German  rate  during 
the  fifty-six  years  ending  with  1900  was  higher  on  the  average 
by  about  two-thirds  of  one  per  cent,  than  the  rate  of  the 
Bank  of  England ;  but  this  is  partly  accounted  for  by  the 
fact  that  the  rate  at  Berlin  was  never  below  three  per  cent. , 
while  for  about  one-third  of  the  time  the  rate  at  L,ondon 
was  two  or  two  and  a  half  per  cent.2 

Discount  rates  were  high  at  the  Imperial  Bank  during  the 
entire  three  years  beginning  with  1905.  The  constant  de- 
mand for  capital  throughout  the  world,  and  the  severe  pres- 
sure exerted  on  European  markets  by  high  rates  in  New 
York  in  the  autumn  of  1905  and  again  in  1906,  compelled  all 
the  European  banks  to  take  unusual  precautions  to  guard 
their  reserves.  The  average  rates  at  the  Imperial  Bank  were 
4,10  per  cent,  in  1901 ;  3.12  per  cent,  in  1902  ;  3.84  percent, 
in  1903  ;  4.22  per  cent,  in  1904  ;  3.82  per  cent,  in  1905  ;  and 
5.15  per  cent,  in  1906.  The  rate  was  changed  eight  times 
in  1905  and  the  year  closed  with  a  six  per  cent,  rate,  which 
never  fell  below  four  and  a  half  per  cent,  in  1906. 

On  December  18,  1906,  the  rate  was  raised  to  seven  per 
cent,  for  the  first  time  since  the  Boer  War  and  did  not  fall 
below  five  and  a  half  per  cent,  at  any  time  during  the  next 
year.  This  was  the  rate  prevailing  when  the  crisis  in  the 
United  States  led  to  a  rate  of  six  and  a  half  per  cent,  on 
October  29th,  and  finally  to  a  special  meeting  of  the  Central 
Committee  which  fixed  the  rate  at  seven  and  a  half  per 
cent,  on  November  8,  1907. 

The  discount  business  of  the  bank  is  largely  that  of  redis- 
count for  the  large  joint  stock  banks,  which  have  come  to 
play  an  important  part  not  only  in  commercial  banking,  but 
in  flotations  of  securities  and  corporation  financing.3  By 

1  Cf.  Palgrave,  Bank  Rate  and  the  Money  Market,  157. 

2  Ibid.,  204. 

3  The  three  largest  of  these  institutions  are  the  Deutsche  Bank, 
with  aggregate  resources  at  the  close  of  1907  of  1,871,720,000  marks 


214        HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

reason  of  the  fact  that  much  paper  is  offered  for  rediscount 
only  some  time  after  it  is  drawn,  the  average  maturities  held 
at  the  Imperial  Bank  are  well  within  the  legal  limit  of  three 
months.  The  average  maturity  of  all  domestic  bills,  which 
in  1876  was  twenty-seven  days  and  in  1898  twenty-five  days, 
was  in  1906  only  twenty  days.  The  average  amount  of  these 
bills  was  1480  marks  ($352)  in  1876,  and  1689  marks  ($402) 
in  1906.  Of  bills  outstanding  at  the  close  of  the  year,  the 
proportion  maturing  in  fifteen  days  or  less  in  1906  was  42 
per  cent.  ;  those  having  thirty-one  to  sixty  days  to  run,  27 
per  cent. ;  and  those  having  from  sixty-one  to  ninety  days 
only  1 5  per  cent.1 

The  proportion  of  the  metallic  reserve  kept  in  gold  was 
not  regularly  stated  until  the  revision  of  the  charter  by  the 
law  of  1909.  The  amount  at  the  close  of  1894  was  7I4»' 
448,000  marks  ($170,000,000).  The  competition  for  the  yel- 
low metal  and  the  great  expansion  of  trade  in  Germany 
prevented  any  permanent  gain  in  gold  during  the  next 
decade  and  reduced  the  average  amount  held  during  1906 
to  674,734,000  marks  and  during  1907  to  633,830,000  marks. 
Among  the  devices  adopted  to  facilitate  the  importation  of 
gold  was  that  of  exempting  advances  upon  imports  of  the 
metal  from  interest  charges  for  a  stipulated  period,  which 
was  extended  in  March,  1908,  to  a  maximum  of  six  weeks.2 

The  redemption  of  notes  in  coin  on  demand  is  required  at 
the  Imperial  Bank  in  Berlin,  but  may  be  refused  at  the 
branches  when  the  funds  on  hand  do  not  justify  it.3  The 


($456,000,006) ;  the  Diskonto  Gesellschaft,  850,000,000  marks  ($202,- 
000,000) ;  and  the  Dresdner  Bank,  1,012,060,000  marks  ($240, 000,000). 
Cf.  the  author's  Principles  of  Money  and  Banking,  II.,  283, 

1  London  Bankers'  Magazine,  December,  1907,  LXXXIV,  700. 

2  Moniteur  des  Interns  Materiels,  March  29,  1908,  979. 

3  The  report,  long  prevalent,  that  the  Imperial  Bank  discriminated 
against  those  seeking  to  withdraw  gold,  was  denied  by  Dr.  Koch,  gov- 
ernor of  the  bank,  in  the  autumn  of  1907,  who  said  that  the  bank 
"  pays  out  gold  in  unlimited  amounts  at  its  central  office  in  Berlin  in 
redemption  of  its  notes  ;  but  that  it  does  not  do  this  at  branches  like 
those  of  Hamburg  and  Bremen,  since,  in  that  case,  it  would  have  to 


THE  BANKS  OF  GERMANY  215 

bank  is  obliged  to  receive  the  bills  of  other  banks  of  issue 
which  have  conformed  to  the  law  of  March  24,  1875,  and 
where  they  are  established  in  cities  of  more  than  80,000 
inhabitants.  Bank  bills  were  not  a  legal  tender  until  1909, 
and  the  original  charter  prescribed  that  "there  exists  no 
obligation  to  accept  bank  bills  for  payments  which  are  legally 
due  in  specie,  and  no  such  obligation  can  be  established 
by  the  legislation  of  any  state  with  regard  to  the  banks  of 
the  state." 

The  government  took  advantage  of  the  extension  of  the 
charter  of  the  Imperial  Bank  in  1889  to  secure  a  larger  share 
in  the  dividends  than  it  had  before  demanded.  The  statute 
of  December  18,  1889,  reduced  from  four  and  a  half  to  three 
and  a  half  per  cent,  the  dividend  allotted  to  the  shareholders 
before  any  other  allotment.  Twenty  per  cent,  of  the  remain- 
ing profits  was  to  be  carried  to  a  reserve  fund,  so  long  as  this 
fund  was  less  than  a  quarter  of  the  capital,  and  the  remainder 
was  to  be  shared  equally  between  the  shareholders  and  the 
Imperial  Treasury  until  the  portion  of  the  shareholders 
reached  six  per  cent.  Of  the  profits  in  excess  of  six  per 
cent,  the  shareholders  obtained  only  a  quarter  and  the  Im- 
perial Treasury  the  other  three-quarters.  The  minimum 
dividend  of  three  and  a  half  per  cent,  was  to  be  made  up  to 
the  shareholders  from  the  reserve  funds  when  it  was  not 
provided  by  the  annual  profits  of  the  bank.  The  reserve 
fund  reached  the  legal  limit  of  one-fourth  of  the  capital  in 
1891.  The  old  law  divided  the  dividends  above  four  and  a 
half  per  cent,  equally  between  the  shareholders  and  the  gov- 
ernment up  to  eight  per  cent.  The  actual  profits  under  the 
old  law  from  1876  to  1888  were  131,900,000  marks,  amount- 
ing to  8.46  per  cent,  annually  on  the  capital.  The  share- 
holders received  94,900,000  marks,  amounting  to  6.08  per 
cent,  of  the  capital  and  the  state  received  24,700,000  marks. 

Further  changes  were  made  in  favor  of  the  government  by 
the  revisions  of  1899  and  1909.  Under  both  laws,  the  share- 
holders were  still  allotted  three  and  one-half  per  cent,  in 


bear  the  expense  of  shipment  to  those  cities." — Letter  in  London 
Economist,  November  9,  1907,  IvXV.,  1925. 


2  1 6  H1STOR  Y  OF  MODERN  BANKS  OF  ISSUE. 

dividends  before  the  distribution  to  the  state,  and  after  an 
allotment  to  the  reserve  fund  three-quarters  of  the  remaining 
profits  went  into  the  public  treasury  and  only  the  remaining 
one-quarter  to  the  shareholders.  The  difference  between  the 
law  of  1899  and  that  of  1909  was  that  under  the  former,  20 
per  cent,  of  surplus  profits  after  the  first  dividend  to  share- 
holders was  carried  to  the  reserve  fund,  until  this  fund  should 
attain  60,000,000  marks,  while  under  the  law  of  1909,  only 
10  per  cent,  of  the  excess  profits  was  to  be  carried  to  the 
reserve  fund.  The  number  of  shareholders  increased  from 
7,877  at  the  close  of  1894  to  18,799  at  the  close  of  1913.  The 
number  of  offices  of  the  bank  on  December  31,  1894,  was  267, 
and  on  December  31,  1913,  487. 

One  of  the  important  services  rendered  to  German  com- 
merce by  the  Imperial  Bank,  which  takes  the  place  in  some 
degree  of  the  clearing  and  cheque  system,  is  the  transfer  of 
deposits  on  current  account  (Giro  Verkehr}.  By  this  system 
a  person  in  any  town  where  there  is  a  branch  of  the  bank, 
wishing  to  make  a  payment  to  some  one  in  another  town, 
may  pay  the  amount  into  the  local  branch  of  the  Imperial 
Bank  and  it  will  be  credited  on  the  following  day  to  the  cur- 
rent account  of  the  person  in  whose  favor  it  is  deposited. 
These  transfers  are  made  without  charge  and  it  is  not  neces- 
sary that  the  person  making  the  payment  shall  have  an 
account  at  the  bank.  The  system  was  devised  partly  to 
facilitate  transactions  in  different  parts  of  the  Empire  and 


1  The  lion's  share  going  to  the  government  under  these  provisions, 
in  case  of  high  discount  rates  and  large  profits,  is  illustrated  by  the 
accounts  for  1907.  Net  profits  stood  at  52,313,651  marks,  against 
40,262,908  marks  in  1906.  The  three  and  a  half  per  cent,  dividend  to 
shareholders  called  for  6,300,000  marks,  and  the  division  of  the  re- 
mainder according  to  law  gave  34,510,238  marks  to  the  state  and  only 
11,503,413  marks  to  shareholders.  Even  under  these  conditions  their 
dividend  was  at  the  rate  of  9.89  per  cent,  as  compared  with  8.22  per 
cent,  in  1906.  If  the  tax  on  excess  circulation  is  taken  into  account, 
the  government  received  40,110,936  marks  (19,450,000)  against  29,- 
164,530  marks  in  1906. — Bulletin  de  Statistique,  April,  1908,  LXIII., 
478. 


THE  BANKS  OF  GERMANY.  21? 

partly  to  economize  the  use  of  specie.  In  the  latter  respect 
it  has  been  eminently  successful,  the  proportion  paid  in  specie 
having  declined  from  39.5  per  cent,  in  1876  to  16.8  per  cent, 
in  1900. 

In  two  other  respects  the  Imperial  Bank  has  conformed  in 
recent  years  to  modern  methods  of  giving  flexibility  to  its 
resources  and  strengthening  its  control  over  the  money  mar- 
ket. One  of  these  is  the  accumulation  of  foreign  bills,  par- 
ticularly those  drawn  on  England,  in  its  portfolio.  President 
Koch,  discussing  this  policy  early  in  December,  1906,  de- 
clared that  it  was  the  practice  of  the  bank  to  buy  these  bills 
at  times  when  they  were  low  and  to  sell  them  later,  when,  in 
consequence  of  the  higher  rate  of  exchange,  there  might 
otherwise  be  danger  of  gold  exports.1  The  other  measure  is 
that  known  in  England  as  "borrowing  from  the  market." 
This  process  consists  in  offering  Treasury  bills  for  re-dis- 
count in  the  open  market,  thereby  absorbing  surplus  cash 
and  preventing  a  too  rapid  fall  in  the  open  market  rate.2 

The  law  of  June  i,  1909,  did  not  alter  the  amount  of  the 
capital  of  the  bank,  wThich  had  been  increased  in  1889  to 
1 80,000,000  marks  ($43, 000,000).  Several  important  changes 
were  made,  however,  in  respect  to  the  note  issue.  The  total 
amount  of  uncovered  notes  which  the  Imperial  Bank  was 
authorized  to  issue  free  of  tax  was  increased  to  550,000,000 
marks  ($130,750,000),  and  the  total  note  circulation  for  all 
banks  of  issue  was  fixed  at  618,000,000  marks.  A  new  pro- 
vision was  made  for  the  Imperial  Bank,  however,  by  which 
the  amount  of  uncovered  notes  free  of  tax  was  permitted 
to  rise  to  750,000,000  marks  for  the  weekly  periods  at  the 
end  of  March,  June,  September,  and  December  of  each 
year.  This  provision  was  made  to  meet  the  special  demand 
for  currency  occasioned  by  the  custom  which  prevails  in 

1  London  Economist,  December  8,  1906,  I/XIII.,  2006. 

2 This  was  done  in  February,  1908,  when  40,000,000  marks  in 
Treasury  bills  were  thus  offered  and  President  Havenstein  declared 
that  the  fall  in  the  open  market-rate  did  not  represent  the  real  state 
of  the  market. — Berlin  letter  in  New  York  Evening  Post,  February  29, 
1908. 


2 1 8  HIS  TOR  Y  OF  MODERN  B A  NKS  OF  ISSUE. 

Germany  of  the  quarterly  settlement  of  commercial  accounts. 

Another  important  change  was  the  making  of  the  notes  of 
the  Imperial  Bank  legal  tender.  It  was  stated  in  the  report 
presented  with  the  bill  to  the  Reichstag  that,  as  bank-notes 
were  regularly  employed,  and  for  large  amounts  almost  ex- 
clusively, it  was  advisable  to  fix  their  legal  status  in  order  to 
avoid  difficulties  when  they  were  tendered  as  legal  payment.1 
At  the  same  time,  the  notes  were  made  redeemable  exclu- 
sively in  German  gold  coin,  instead  of  merely  in  German 
currency,  which  included  government  notes  and  silver.  A 
further  obligation  was  imposed  upon  the  Imperial  Bank  to 
accept  at  par  the  notes  of  the  state  banks  of  issue,  at  its  main 
office  in  Berlin,  and  at  branch  offices  in  the  larger  cities. 

The  characteristic  feature  of  the  policy  of  the  Imperial 
Bank  during  recent  years  has  been  the  building  up  of  a  gold 
reserve  which  should  be  adequate  to  the  strain  of  the 
political  anxieties  which  prevailed  in  Europe  during  and 
after  the  struggle  in  the  Balkans.  By  bidding  high  for  the 
precious  metal  whenever  it  appeared  in  free  markets  and  by 
maintaining  the  discount  rate  at  six  per  cent,  for  nearly  ten 
months  (from  January  ist  to  October  27th),  affording  an 
average  rate  for  1913  of  5.885  per  cent.,  the  bank  increased 
its  metallic  reserves  from  1,081,711,000  marks  ($257,000,000) 
on  January  7,  1913,  to  1,540,135,000  marks  ($366,000,000) 
on  November  22,  1913.  The  average  gold  holdings,  which 
were  880,083,000  marks  ($209,400,000)  for  1912,  rose  to 
1,067,596,000  marks  ($254,000,000)  for  1913,  and  the  process 
of  gold  accumulation  was  continued  well  into  the  following 
year.  This  increase  in  the  gold  stock  was  accomplished  in 
part  by  the  substitution  of  small  notes  for  gold  drawn 
from  the  circulation.  The  outstanding  issues  of  notes  of 
50  marks  ($11.90)  and  of  20  marks  ($4.76)  were  increased 
from  367,008,770  marks  on  December  31,  191 1,  to  681,822,040 
marks  on  December  31,  1913,  or  by  a  total  of  314,813,730 
marks  ($74,800,000). 


T"  Renewal  ofReichsbank  Charter,"  National  Monetary  Commis- 
sion, Senate  Document  507,  6ist  Congress,  Second  Session,  p.  98. 


CHAPTER    IX. 

THE    AUSTRO-HUNGARIAN    BANK. 

The  Evils  of  a  Century  of  Paper  Money — The  First  Issues  of  Notes 
and  the  Efforts  to  Restore  Coin  Redemption — The  Creation  of 
the  Imperial  Bank  and  the  Successive  Changes  in  its  Charter — 
Establishment  and  Growth  of  the  Hungarian  Branch — The  Mone- 
tary Reform  of  1892  and  the  New  Rate  of  Exchange — Use  of 
Modern  Devices  for  Maintaining  Stability  of  Exchange. 

THE  Austrian  Empire  has  been  for  a  century  under  the 
dominion  of  paper  money,  but  her  monetary  history 
has  differed  from  that  of  France  with  the  assignats 
and  the  United  States  with  the  Continental  money  of  the 
Revolution.  The  Austrian  paper  money  has  been  a  serious 
detriment  to  the  commercial  development  of  the  country  and 
the  solidity  of  business  enterprises,  but  the  volume  has 
never  reached  the  point  of  absolute  worthlessness  and  re- 
pudiation. The  effect  of  the  system  has  been,  in  the  lan- 
guage of  Professor  Sumner,1  "not  like  an  acute  disease  ;  it 
is  like  an  invalid  state  with  occasional  fever. ' '  The  first 
issues  of  paper  money  seem  to  have  had  the  same  beneficial 
effects  as  the  issues  of  L,aw's  bank  in  France  and  the  issues 
of  £i  bank-notes  in  Scotland,  in  stimulating  business  en- 
terprises and  affording  a  convenient  circulating  medium 
where  none  existed,  but  the  limit  was  soon  over-passed  and 
the  Austrian  paper  money  began  its  downward  course.  This 
course  has  been  several  times  arrested  by  earnest  efforts  on 
the  part  of  the  government,  only  to  be  resumed  when  the 
necessities  of  war  compelled  new  issues  of  paper.  The  fi- 

1  History  of  American  Currency,  p.  323. 

219 


22O         HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

nancial  history  of  the  Austrian  Empire  has  been  a  succes- 
sion of  acts  for  refunding,  for  new  issues  of  interest-bearing 
and  non-interest  bearing  securities,  and  new  regulations  for 
the  Austrian  National  Bank  until  the  recital  becomes  almost 
tedious.  The  government  and  the  bank  have  been  able  in 
recent  years  to  accumulate  a  large  stock  of  gold,  the  paper 
money  has  risen  much  above  the  value  of  standard  silver 
coins,  and  unless  the  country  is  dragged  into  some  new  war 
she  will  soon  accomplish  the  resumption  of  specie  payments 
upon  a  gold  basis. 

The  first  important  banking  institution  in  Austria  seems 
to  have  been  created  at  Vienna  by  a  decree  of  June  16,  1703, 
with  a  capital  of  7,000,000  florins  ($3,500,000).  It  was 
created  for  the  purpose  of  rescuing  the  government  from  the 
evils  of  a  debased  currency  which  even  then  existed,  but 
was  authorized  to  receive  the  deposits  of  individuals,  like 
the  similar  establishments  of  Venice,  Hamburg,  and  Amster- 
dam. It  was  essentially  a  governmental  institution  and  was 
formed,  like  the  Bank  of  Venice,  for  the  funding  of  the  pub- 
lic debt,  which  was  to  be  accomplished  by  an  annual  levy 
upon  the  receipts  of  the  Treasury  for  the  security  and  retire- 
ment of  the  mandates  or  assegni  which  the  new  establish- 
ment was  authorized  to  issue.1  The  experiment  was  not 
successful.  The  government  was  unable  in  the  involved 
state  of  the  finances  to  make  the  annual  payments  to  which 
it  wras  pledged  and  the  mandates  issued  by  the  bank  were 
received  very  reluctantly  into  the  monetary  circulation.  The 
government  finally  turned  the  institution  over  to  the  City  of 
Vienna  and  it  took  the  name  of  the  Bank  of  the  City  of 
Vienna.  The  transformation  did  not  save  it.  The  bank 
suspended  operations  in  drafts  on  private  account  in  order  to 
devote  its  entire  resources  to  refunding,  but  the  expected 
means  for  this  work  failed  and  the  bank  went  into  liquida- 
tion at  the  expense  of  its  depositors  and  shareholders.  No 
further  attempt  was  made  to  establish  a  national  bank  for 
over  a  century. 


>  Noel,  L,  344. 


THE  AUSTRO-HUNGARIAN  BANK.  221 

The  Austrian  Empire  found  itself  in  1761  in  one  of  the 
most  critical  stages  of  its  history.  The  headship  of  Ger- 
many, which  descended  to  the  Hapsburgs  from  Charle- 
magne, was  escaping  from  Austrian  control  under  the  potent 
influence  of  Frederick  the  Great  of  Prussia,  and  Austrian 
finances  were  involved  in  an  inextricable  confusion  in  which 
the  one  patent  fact  of  a  deficit  was  all  that  was  not  obscure. 
The  Count  of  Sinzendorff,  one  of  the  leading  ministers  of  the 
Empire,  noticed  that  the  condition  under  which  loans  were 
contracted  afforded  no  opportunity  to  small  capitalists  to  in- 
vest. He  presented,  therefore,  a  project  by  which  bills  of 
from  20  to  100  florins  were  issued,  with  coupons  attached 
indicating  the  value  from  day  to  day,  with  interest  added  at 
six  per  cent.  Public  depositories  were  authorized  to  receive 
these  bills  in  payment  of  taxes  and  to  disburse  them  to  the 
creditors  of  the  State  at  their  value  at  the  date  of  payment, 
including  accrued  interest.  M.  Noel  says  regarding  the 
effects  of  this  issue  : 

The  public  were  not  slow  to  receive  these  bills  with  favor  and  the 
circulation  attained  immediately  such  proportions  that  the  govern- 
ment felt  able  to  dispense  with  the  provision  for  interest,  which 
created  a  heavy  charge  upon  the  Treasury.  It  decided  to  substitute, 
by  a  system  of  exchanges  from  day  to  day,  paper  money  without  in- 
terest for  the  original  interest-bearing  bills,  which  represented  a  par- 
ticular kind  of  Treasury  bonds  ;  and  in  redeeming  the  last,  in  order 
to  avoid  confusion,  it  issued  notes  of  five,  ten,  twenty-five,  fifty,  and 
one  hundred  florins.  Public  opinion  showed  itself  as  favorable  to  the 
employment  of  the  new  money  as  to  the  circulation  of  the  first,  and 
the  numerous  facilities  which  it  gave  to  daily  transactions  gave  it  a 
preference  even  over  metallic  money.1 

The  government  could  not  content  themselves  with  the 
moderate  use  of  the  power  in  their  hands.  A  second  issue 
of  notes  was  decreed  in  1769  and  a  third  in  1771.  Commerce 
was  expanding,  aided  to  some  extent  by  the  convenience  of 
the  new  note  issues,  and  the  government  seized  the  oppor- 
tunity for  injecting  fresh  masses  of  paper  into  the  circulation. 
These  excessive  issues  provoked  a  panic  in  1797,  which 

1  Banques  d*1  Emission  en  Europe,  L,  340. 


222          HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

obliged  the  government  to  give  forced  legal  tender  character 
to  the  paper  and  even  to  refuse  its  conversion  into  securities 
of  the  consolidated  debt.  Specie  rose  to  a  premium  of  thir- 
teen per  cent,  in  December,  1799,  and  began  to  disappear 
from  circulation,  and  in  1800  the  Treasury  attempted  to  fill 
its  place  by  the  creation  of  notes  of  one  and  two  florins  (fifty 
cents  and  one  dollar).  Austria  lost  several  Italian  provinces 
as  the  result  of  the  brilliant  campaigns  of  Napoleon,  and  the 
inhabitants  of  those  provinces  who  held  Treasury  bills  over- 
ran the  public  depositories  with  the  demand  for  payment  in 
specie.  The  separation  between  coin  and  paper  constantly 
grew  wider,  until  in  1 806  paper  circulated  for  only  half  its 
value  in  silver,  which  was  then  the  metallic  standard.  The 
Treasury  made  repeated  promises,  which  could  not  be  kept, 
that  a  part  of  the  annual  tax  levy  should  be  consecrated  to 
the  reduction  of  the  paper  circulation.  The  need  for  funds 
was  so  urgent  that  decrees  were  issued  ordering  the  trans- 
mission to  the  Treasury  of  silver  vessels,  jewelry,  the  deco- 
rations of  the  churches  and  the  consecrated  fonts  throughout 
the  empire,  which  were  paid  for  in  paper  money  at  three 
times  their  specie  value. 

The  peace  which  followed  the  French  victory  at  Wagram 
in  1809  and  the  marriage  of  the  Archduchess  Maria  Louisa 
with  Napoleon  afforded  an  opportunity,  which  the  govern- 
ment embraced,  to  attempt  the  restoration  of  order  in  the 
public  finances.  Delegates  from  all  the  provinces  were 
assembled,  but  they  found  almost  insuperable  difficulties  in 
the  inefficiency  and  corruption  of  public  officials  and  the  ab- 
solute lack  of  confidence  by  the  business  community  and  the 
people  in  the  oft-broken  pledges  of  the  government.  The 
issues  of  government  paper  money  had  steadily  increased 
from  74,200,000  florins  ($37,000,000)  in  1797  to  1,064,000,000 
florins  ($530,000,000)  in  1811.  The  value  of  the  paper  had 
declined  almost  in  proportion  to  the  increase  in  the  issues. 
The  price  of  silver  expressed  in  paper  was  118  in  December, 
1800.  It  steadily  rose  to  203  in  1807,  leaped  to  500  in  De- 
cember, 1 8 10,  with  the  enormously  increased  issues  of  the 
three  intervening  years,  and  touched  1200  for  a  time  in  1811. 


THE  AUSTRO-HUNGARIAN  BANK.  22$ 

The  method  adopted  in  France,  when  the  territorial  man- 
dates were  substituted  for  the  assignats^  was  followed  by 
Austria,  which  declared  the  reduction  of  existing  issues  to 
one-fifth  of  their  original  value  and  substituted  redemption 
notes  (Einlosungsscheine),  which  were  called  Viennese 
money.  The  decree  of  February  20,  1811,  which  put  this 
reduction  in  force,  was  issued  with  the  avowed  purpose  of 
arresting  the  fluctuations  in  the  paper  money,  which  were 
declared  to  be  "so  extremely  pernicious,  because  they 
shatter  private  fortunes,  fetter  industry,  derange  all  social 
relations,  and  give  birth  to  distrust  and  jealousy."  '  The 
decree  was  despatched  under  seal  to  the  officials  in  different 
parts  of  the  Empire,  to  be  opened  at  five  o'clock  in  the  morn- 
ing on  March  15,  1811,  and  the  announcement  was  awaited 
by  eager  crowds  who  looked  to  the  action  of  the  Emperor  to 
relieve  the  public  distress.  The  majority,  who  held  quan- 
tities of  the  paper,  went  away  cursing  the  government  for 
the  decree.  A  few,  who  were  believed  to  have  had  previous 
notice  of  its  contents,  had  put  their  affairs  in  a  shape  which 
left  them  rich,  as  some  of  the  purchasers  of  stock  in  the 
Mississippi  Company  of  John  Law  had  transformed  it  into 
real  estate  or  exported  the  proceeds  in  coin  while  the  stock 
was  still  selling  at  high  figures.  The  government  promised 
to  limit  the  new  issues  of  redemption  paper  to  just  enough 
to  redeem  the  outstanding  notes  in  the  proposed  ratio  of  one 
to  five,  which  would  be  about  212,000,000  florins.  The  new 
notes  were  depreciated,  however,  from  the  first  day  of  their 
issue  and  fell  to  fifty  per  cent,  during,  the  year,  but  rose  to 
eighty-seven  per  cent,  when  the  public  began  to  believe  that 
the  quantity  would  not  be  increased.  The  suspension  of 
new  issues  was  only  for  a  brief  period  and  the  necessities  of 
the  last  Napoleonic  wars  forced  the  issues  up  to  638,900,000 
florins  ($319,000,000)  in  1816. 

The  distrust  and  business  paratysis  caused  by  these  re- 
peated paper  issues  and  the  necessity  of  raising  money  to 
carry  on  the  government  led  to  the  creation  of  the  National 


1  Leroy-Beaulieu,  II.,  644. 


224         HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

Bank  of  Austria.  The  Emperor,  in  issuing  the  imperial 
patent  for  the  establishment  of  the  bank,  invoked  the  public 
confidence  b}'  declaring  that  he  had  from  the  first  desired 
to  re-establish  order  in  the  standard  of  value,  but  that  the 
violent  shocks  which  had  rent  Kurope  asunder  had  involved 
Austria  in  a  series  of  difficult  wars,  in  which  the  preservation 
and  the  independence  of  the  monarchy  became  dearer  than 
mere  questions  of  finance.  He  pledged  himself  to  the  people, 
that  no  new  paper  money  should  be  put  in  circulation  and  that 
the  withdrawal  of  that  already  out  should  be  confided  to  a 
national  privileged  establishment.1 

A  party  of  capitalists  was  formed  after  some  delay  and  the 
statutes  of  the  National  Bank  of  Austria  received  the  Impe- 
rial approval  on  July  15,  1817.  The  bank  was  accorded  for 
twenty-five  years  the  exclusive  privilege  of  note  issues,  was 
exempted  from  the  stamp  taxes,  and  was  authorized  to  accept 
deposits  and  discount  commercial  paper.  The  entire  capital 
was  to  be  110,000,000  florins  ($55,000,000)  in  shares  of  noo 
florins  each,  payable  100  florins  in  silver  and  1000  florins  in 
paper.  The  bank  was  able  to  dispose  of  only  50,621  shares, 
from  which  the  proceeds  were  $2,600,000  in  silver  coin  and 
$29,000,000  in  paper.  The  government  took  up  and  de- 
stroyed the  paper  and  issued  an  equal  amount  of  securities 
bearing  interest  at  the  rate  of  two  and  a  half  per  cent.  As 
the  notes  were  depreciated  to  one-third  of  their  nominal 
value,  this  amounted  to  seven  and  a  half  per  cent,  upon  the 
real  capital  realized,  which  was  about  $12,300,000  ($2,600,- 
ooo  in  coin  and  $9,700,000  in  the  coin  value  of  the  paper). 
The  services  of  the  bank  in  restoring  confidence  and  busi- 
ness activity  were  further  compensated  by  permission  to 
issue  a  quantity  of  notes  which  the  government  pledged 
itself  to  accept  as  cash  without  the  privilege,  which  was 
accorded  to  individuals,  of  demanding  redemption  in  coin. 
The  government  showed  its  good  faith  by  devoting  to  the 
retirement  of  the  paper  money  a  part  of  the  war  contribution 
paid  by  France,  and  131,829,887  florins  were  soon  withdrawn 


Noel,  I.,  345-46. 


THE  AUSTRO-HUNGARIAN  BANK.  22$ 


from  circulation,  reducing  the  amount  outstanding  to 
886,038  florins  ($273,000,000).  The  bank  continued  the 
process  of  converting  the  government  money  into  bank-notes 
until  on  December  31,  1847,  the  amount  outstanding  was 
reduced  to  9,712,838  florins  (14,850,000). 

The  uprising  in  Hungary  in  1848,  the  Crimean  War,  and 
the  Italian  struggle  which  resulted  in  Austrian  defeat  at 
Magenta  and  Solferino,  imposed  new  charges  upon  the  Aus- 
trian government  and  did  much  to  upset  the  work  of  the 
bank  during  the  thirty  years  of  peace  from  1816  to  1846. 
The  bank  had  proceeded  so  rapidly  with  the  conversion  of 
the  government  paper  money  as  to  endanger  its  own  security 
and  alarming  runs  were  threatened  in  1831,  and  again  in 
1840,  which  were  only  averted  by  the.help  of  the  government 
and  in  the  latter  case  by  a  loan  of  coin  from  the  private 
banks  of  Vienna.  The  charter  of  the  bank  expired  in  1842, 
but  the  Emperor  signed  a  patent  renewing  its  privileges, 
with  some  modifications,  until  December  31,  1866.  The 
bank  had  enjoyed  until  this  time  the  exclusive  privilege  .of 
discount  as  well  as  the  monopoly  of  note  issues,  but  the 
former  privile^  was  now  thrown  open  to  others  and  the 
power  to  make  loans  upon  real  estate  mortgages  was  with- 
drawn. The  bank  had  contributed  somewhat  to  the  expan- 
sion of  commerce  by  its  discounts,  but  its  immense  advances 
to  the  government  prevented  its  applying  so  much  capital  as 
was  needed  for  the  development  of  new  private  enterprises. 
Financial  societies  and  private  banks  of  discount  had  sprung 
up  in  the  important  centres  and  their  success  and  legality 
depended  upon  sharing  with  the  National  Bank  the  power  to 
make  discounts  and  advances. 

The  bank  at  the  end  of  the  year  1847  possessed  a  metallic 
reserve  of  70,240,000  florins  ($35,000,000)  and  maintained  a 
circulation  of  213,000,000  florins.  The  outbreak  of  the  revo- 
lution in  Hungary  brought  the  bill-holders  in  crowds  to  the 
bank  for  the  redemption  of  the  notes  and  the  coin  reserve 
shrunk  in  a  few  days  to  35,023,030  florins.  The  directors 
were  seized  with  panic  and  secured  from  the  government  the 

decree  of  June  20,   1848,  authorizing  the  bank  to  suspend 
15 


226          HISTORY  Of  MODERN  BANKS  OF  ISSUE. 

specie  payments  and  giving  forced  legal  tender  character  to 
its  notes.  The  government  hesitated  to  take  this  desperate 
step  and  accompanied  it  with  decrees  intended  to  prevent 
the  export  of  gold  and  silver,  even  to  the  amount  of  more 
than  loo  florins  ($50)  in  the  pockets  of  tourists.  The  gov- 
ernment at  the  same  time  resumed  the  issue  of  its  own  paper 
promises  in  the  form  of  interest-bearing  mandates,  redeem- 
able in  four,  eight,  and  twelve  months.  The  fifth  of  these 
issues,  in  1849,  was  given  forced  legal  tender  character  and 
the  notes  were  no  longer  to  be  redeemed  in  coin.  Gold  and 
silver  began  to  disappear  from  circulation,  pieces  of  six  and 
ten  kreutzers  (one  to  two  cents)  were  coined  only  to  disap- 
pear, and  bank  bills  of  one  florin  and  Treasury  bills  of  six 
and  ten  kreutzers  were  issued  to  take  the  place  of  the  small- 
est coins.  The  credit  of  the  bank  began  to  sink  with  that 
of  the  government  and  the  depreciation  of  the  bills  in  the 
middle  of  1849  to  about  half  their  nominal  value  alarmed 
the  administration  and  led  to  a  solemn  declaration  that  no 
more  loans  should  be  demanded  from  the  bank  and  that  the 
existing  debt  should  be  adjusted  and  consolidated. 

The  history  of  the  thirteen  years  from  1848  to  1861  is  the 
history  of  the  disregard  of  this  pledge  and  of  repeated  loans 
negotiated  through  the  bank  in  spite  of  continual  efforts  to 
refund  the  debt  and  reduce  its  proportions.  The  aggregate 
of  funded  and  floating  debts  due  the  bank  by  the  govern- 
ment was  178,500,000  florins  on  January  i,  1849,  and  205,- 
300,000  florins  on  January  i,  1850.  Considerable  reductions 
were  made  during  the  next  four  years  and  the  figures  were 
carried  down  to  121,700.000  florins  on  January  i,  1854.  The 
provisions  for  the  Crimean  War  forced  the  figures  up  again 
with  a  bound  to  294,200,000  florins  ($i 47, 000,000)  on  Janu- 
ary i,  1855.  The  reduction  of  the  debt  began  again  the 
next  year  and  continued  until  it  was  reduced  on  January  i , 
1859,  to  145,700,000  florins,  but  the  war  with  the  Italian 
States  and  France  carried  the  amount  up  again  to  285,800,- 
ooo  florins.1  M.  Paul  Leroy-Beaulieu,  after  reviewing  the 


Iveroy-Beaulieu,  II.,  646. 


THE  AUSTRO-HUNGARIAN  BANK.  227 

long  series  of  negotiations  between  the  government  and  the 
bank,  sums  up  the  lesson  of  these  years  as  follows  : 

It  is  apparent  how  political  events  hurled  the  state  farther  and  far- 
ther down  the  path  of  forced  legal  tender  at  the  moment  when  the 
resumption  of  specie  payments  seemed  at  hand.  It  is  apparent  also 
of  what  little  use  were  pledges,  whether  of  realty  or  securities,  to 
hasten  the  liberation  of  the  state  and  to  permit  the  bank  to  terminate 
the  suspension  of  specie  payments.  It  is  because  all  such  pledges  are 
incapable  of  negotiation  at  short  notice  without  great  loss.  It  is  ap- 
parent also  what  singularly  advantageous  conditions  the  bank  ob- 
tained from  the  state  for  its  advances.  It  enjoyed  an  interest  of  two 
or  three  per  cent,  on  sums  in  paper  which  cost  it  nothing.1  This 
situation  was  too  favorable  for  the  bank  for  it  to  show  itself  rigorous 
towards  the  state.  Bvery  exhibition  of  complaisance  which  it  made 
was  the  source  of  abundant  revenue.  This  rate  of  two  or  three  per 
cent,  was  extravagant.  In  France  one  per  cent,  was  adopted  and  in 
Italy  six-tenths  of  one  per  cent.  The  transformation,  for  such  a  long 
period  of  time,  of  a  great  establishment  of  credit  into  the  official 
lender  of  the  state  had  the  disastrous  consequence  that  this  establish- 
ment could  with  difficulty  fulfil  its  natural  mission  of  lending  to  com- 
merce. One  cannot  serve  two  masters,  and  a  bank  which  always  has 
its  hand  in  its  coffers  to  make  advances  to  the  state  is  compelled  to 
show  itself  more  stringent  towards  manufacturers  and  merchants. 

The  attempt  to  resume  specie  payments  seemed  upon  the 
eve  of  success  in  1859.  A  monetary  convention  was  con- 
cluded January  24,  1857,  with  the  view  to  securing  a  uniform 
currency  throughout  Germany,  by  which  the  contracting 
parties,  of  which  Austria  was  one,  were  to  issue  no  more 
legal  tender  paper  after  January  i,  1859,  which  was  not  re- 
deemable in  coin  on  demand.  An  Imperial  ordinance  of 
April  30,  1858,  prepared  the  way  for  resumption  by  provid- 
ing that  after  November  ist  of  the  same  year  one-third  of 

1  M.  Noel  seems  to  ignore  this  element  of  the  bank  loans  and  says  : 
"  The  bank,  during  the  entire  period  which  elapsed  from  its  origin  to 
1861,  had  risen  to  the  level  of  its  heavy  task.  It  had  contributed  en- 
ergetically to  sustain  the  government  in  the  difficult  situations  which 
it  had  traversed  and  its  support,  often  disinterested,  had  merited  gen- 
eral confidence.  Far  from  abusing  the  opportunity  of  the  multiplied 
crises  which  had  obliged  the  Imperial  Treasury  to  appeal  to  it,  it  had 
endeavored  to  lighten  the  burden  of  the  sacrifices  imposed  by  events 
upon  the  country." — Banques  d1  Emission  en  Europe,  I.,  364. 


228         HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

the  new  bills  should  be  covered  by  coin  or  bullion  and  that 
the  other  two-thirds  should  be  represented  in  the  assets  of 
the  bank  by  securities  or  commercial  paper.  An  arrange- 
ment was  also  concluded  between  the  government  and  the 
bank  for  the  retirement  of  100,000,000  florins  in  small  notes 
by  the  pledge  of  the  domains  of  the  State.  War  with  Italy 
upset  these  carefully  laid  plans  and  on  April  29,  1859,  the 
bank  was  again  released  from  the  obligation  of  coin  redemp- 
tion, and  the  government  appealed  to  it  for  a  loan  of  200,- 
000,000  florins.  This  was  met,  to  two- thirds  of  its  fac^ 
value,  by  the  issue  of  bank-notes  entirely  in  denominations 
of  five  florins  ($2.50).  The  public  had  no  use  for  so  many 
small  bills  and  they  rapidly  returned  to  the  bank.  The  loan 
with  which  it  was  sought  to  pay  this  advance  by  the  bank 
proved  a  failure  and  the  government  was  compelled  to  deliver 
a  variety  of  securities  in  addition  to  the  unplaced  obligations 
of  the  loan,  with  a  condition  that  they  should  not  be  marketed 
before  November  i,  I86I.1 

The  management  of  the  bank  decided  on  May  9,  1853,  to 
issue  the  49,379  shares  which  had  remained  undisposed  of 
since  1820  and  they  gave  the  preference  to  the  holders  of  the 
original  shares,  at  the  rate  of  800  florins  payable  in  bank 
bills,  which  were  then  below  par.  The  bank  was  again  au- 
thorized by  a  decree  of  October  21,  1855,  to  loan  money  on 
mortgages  and  issue  mortgage  bonds.  This  branch  of  busi- 
ness rapidly  developed  and  on  December  31,  1858,  already 
employed  about  37,000,000  florins  ($18,500,000).  The  capi- 
tal of  the  bank  was  again  doubled  and  immediately  after- 
wards increased  by  50,000  new  shares  issued  at  the  rate  of 
about  725  florins,  which  made  the  total  capital  on  December 
31,  1855,  about  110,250,000  florins  ($55,000,000).  A  law  of 
November  13,  1868,  reduced  the  capital  again  to  90,000,000 
florins  ($45,000,000). 

The  approach  of  the  termination  of  the  privileges  of  the 
bank  led  to  an  earnest  discussion,  which  resulted  in  the  law 
of  December  27,  1862,  remodelling  the  charter  of  the  insti- 


1  I/eroy-Beaulieu,  II.,  650. 


THE  AUSTRO-HUNGARIAN  BANK. 


229 


tion  and  its  relations  with  the  government.  The  govern- 
ment proposed  the  renewal  of  the  charter  until  1890  ;  the 
finance  committee  of  the  elective  chamber  proposed  1880. 
The  subject  was  referred  to  a  mixed  committee  of  both  cham- 
bers, which  finally  fixed  the  limit  at  December  31,  1876. 
The  privileges  of  the  bank  were  broadened  from  time  to 
time  until  1877,  when  the  law  of  December  2oth,  terminating 
the  commercial  treaties,  provided  also  that  the  ministry 
should  conclude  an  arrangement  with  the  bank  extending  its 
privileges  until  March  29,  1878.  A  subsequent  act  made 
the  limit  May  31,  1878,  and  one  month  later  the  National 
Bank  of  Austria  was  fused  with  the  Austro-Hungarian 
Bank. 

The  National  Bank,  during  its  later  years,  in  spite  of  the 
manner  in  which  it  was  fettered  by  its  relations  to  the  gov- 
ernment and  the  suspension  of  specie  payments,  conducted 
its  relations  with  the  business  community  in  such  a  way  as 
to  contribute  in  a  considerable  measure  to  the  expansion  of 
industry.  The  business  paper  carried  increased  from  about 
32,000,000  florins  ($16,000,000)  in  1848  to  75.000,000  florins 
in  1854  and  90,000,000  florins  ($45, 000,000)  in  1855.  The 
advances  on  public  securities  increased  from  about  15,000,- 
ooo  florins  in  1848  to  50,000,000  florins  in  1854  and  82,000,- 
ooo  florins  in  1855.  The  discounts  increased  nearly  forty  per 
cent,  from  1865  to  1877  and  would  probably  have  reached  a 
larger  figure  but  for  the  liquidations  following  the  crisis  of 
1873.  The  following  table  shows,  in  florins,  the  aggregate 
amount  of  the  commercial  paper  discounted  every  alternate 
year  from  1865  to  1877  : 


YEAR. 

AT  VIENNA. 

AT  AUSTRIAN 
BRANCHES. 

AT  HUNGARIAN 
BRANCHES. 

TOTAL. 

1865 
1867 
1869 
1871 
1873 
1875 
1877 

383,648,611 
183,330,404 
232,424,629 
331,436,438 
468,286,132 
310,430,552 
298,706,477 

63,924,852 
76,028,931 
125,830,418 

173,573,951 
24O,OO7,674 
221,522,518 
212,324,840 

23,563,202 
37,340,086 
IO3,59O,858 
134,386,521 
168,973,050 
147,671,119 
135,296,195 

471,136,665 
296,699,422 
461,845,906 

639,  396.Q11 
877,266,856 
679,624,190 
646  327,512 

230          HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

The  provisions  for  regulating  the  note  issues  which  were 
adopted  in  1863  bear  the  traces  of  the  English  legislation  of 
1844.  They  provided  for  an  "uncovered"  circulation  of 
200,000,000  florins  ($100, 000,000)  and  that  all  notes  issued 
beyond  that  sum  should  be  covered  by  gold  or  silver  coin  or 
bullion.  The  uncovered  circulation  was  required  to  be  pro- 
tected by  commercial  paper,  by  securities  deposited  for 
advances,  by  the  coupons  of  mortgages  matured  and  payable 
or  by  mortgage  bonds  of  the  bank.  This  last  form  of  secu- 
rities was  not  allowed  to  exceed  20,000,000  florins  and  they 
were  accepted  for  only  two-thirds  of  their  nominal  value. 
Gold  coin  or  bullion  was  at  that  time  allowed  to  take  the 
place  of  silver  to  the  extent  of  only  a  quarter  of  the  metallic 
reserve.  A  decree  of  October  30,  1868,  authorized  the  bank 
to  count  as  security  for  the  uncovered  circulation  bills  of 
exchange  drawn  upon  foreign  places,  and  a  law  of  March 
18,  1872,  gave  the  bank  discretion  as  to  the  proportion  of 
gold  and  silver  to  be  kept  in  its  reserves. 

The  attempt  to  tie  the  note  circulation  rigidly  to  deposits 
of  specie  broke  down  as  completely  in  Austria  as  it  has 
broken  down  in  England  every  time  that  a  crisis  has  oc- 
curred. The  first  suspension  of  the  limit  was  authorized  by 
the  government  for  a  brief  period  in  1866.  The  bank  was 
compelled  again  in  1869  to  suspend  advances  upon  private 
deposits  of  bullion  and  did  not  resume  this  branch  of  its 
business  for  two  years,  in  spite  of  the  protests  of  manufac- 
turers and  brokers.  The  bank  pursued  a  very  conservative 
course  while  the  fever  of  speculation  was  upon  the  country, 
but  was  unable  to  come  to  the  rescue  of  mercantile  credit 
when  the  crisis  of  1873  broke  out,  because  of  the  limitations 
upon  its  circulation.  The  condition  of  credit  became  so 
critical  that  the  government  was  obliged  to  intervene  in 
almost  precisely  the  same  manner  as  in  England.  A  letter 
was  addressed  to  the  bank  by  the  Minister  of  Finance  on  May 
*3>  l873>  revoking  the  provisions  of  Article  14  of  the  statutes 
of  the  bank,  relative  to  the  metallic  security  for  bank-notes, 
and  an  ordinance  to  the  same  effect  was  approved  by  the 
Diet.  The  ordinance  gave  the  bank  authority  to  issue  notes 


THE  AUSTRO-HUNGARIAN  BANK.  2$l 

by  discounting  bills  of  exchange  and  making  advances  on 
public  securities  without  any  other  limitation  than  its  own 
good  judgment.  Under  this  authority  the  bank  granted 
extraordinary  credits  to  the  amount  of  64,451,000  florins  in 
Austria,  and  30,119,000  florins  in  Hungary.  The  circula- 
tion exceeded  the  legal  limit  several  times  in  May  and  July 
and  was  almost  continuously  above  the  limit  during  October, 
November,  and  December,  1873.  The  effect  of  the  action 
of  the  bank  was  almost  instantaneous  in  restoring  credit. 
"  The  first  moment  of  panic  passed,"  says  M.  Clement  Jug- 
lar,  ' '  it  was  seen  that  commerce  and  industry  continued  to 
make  good  head  and  that  the  vital  forces  of  the  country 
were  not  exhausted,  the  crisis  having  been  specially  severe 
in  everything  affecting  the  bank." 

Payment  in  coin  on  demand  was  nominally  the  condition 
upon  which  the  bank  held  its  privileges,  but  the  situation 
of  the  government  and  its  relations  with  the  bank  were  such 
that  it  was  thought  necessary  to  maintain  forced  legal  tender 
for  an  indefinite  period.  A  convention  was  signed  between 
the  bank  and  the  government  on  January  3,  1863,  providing 
for  the  resumption  of  specie  payments  by  the  bank  during 
1867,  but  the  war  with  Prussia  postponed  the  event  and  the 
country  continued  to  stagger  through  the  mire  of  irredeem- 
able paper.  An  act  of  May  5,  1866,  authorized  the  gov- 
ernment to  issue  150,000,000  florins  in  government  bills, 
including  notes  of  one  and  five  florins  which  had  already 
been  issued  by  the  bank  and  which  were  now  declared  to  be 
bills  of  state.  The  disasters  of  Sadowa  and  the  other  events 
of  the  war  drove  the  government  to  the  old  device  of  John 
L,aw  and  the  French  revolutionists,  to  guarantee  a  part  of 
its  paper  issues  by  the  salt  mines  of  Gmund,  Hallein,  and 
Aussee,  at  the  same  time  that  the  pledge  was  given  that  the 
maximum  of  the  two  forms  of  the  floating  debt — the  paper 
money  and  the  salt  notes  (Salinenscheine) — should  not  ex- 
ceed 400,000,000  florins.  This  pledge  was  not  kept  to  the 
letter,  but  the  actual  circulation  was  never  greatly  above  the 


1  Des  Crises  Commerciales,  496. 


232          HISTORY  OF  MODERN  BANKS   OF  ISSUE. 

legal  maximum.  The  mean  circulation  of  the  old  paper 
money  in  1876  was  343,029,232  florins  and  of  the  salt  notes 
68,970,395  florins. 

An  effort  was  made  in  1867  to  bring  Austria  within  the 
circle  of  the  Latin  Union  and  to  harmonize  her  monetary 
system  with  that  of  France,  Italy,  Belgium,  and  Switzer- 
land. The  government  consented  to  the  coinage  of  pieces 
of  eight  and  four  florins  in  gold,  equivalent  to  pieces  of 
twenty  and  ten  francs  ($4  and  $2).  The  Franco-German  war 
arrested  the  negotiations  before  they  had  been  ratified,  but 
the  Imperial  government  immediately  began  the  coinage  of 
the  proposed  pieces,  and  they  were  accepted  in  France  in 
public  depositories  by  virtue  of  a  decree  of  June  14,  1874. 
Their  coinage  averaged  about  3,000,000  florins  ($1,500,000) 
per  year,  until  it  was  suspended  by  the  laws  which  reorgan- 
ized the  monetary  system  in  1892. 

The  domestic  troubles  which  broke  out  in  Austria  before 
the  defeat  of  Sadowa  led  to  the  reorganization  of  the  Empire 
according  to  the  system  of  dualism  which  now  prevails.  The 
Hungarian  Diet  was  convoked  at  Pesth  on  November  19, 
1866,  and  a  basis  of  union  with  Austria  upon  the  conditions 
of  local  independence  was  prepared  by  a  committee  of  sixty- 
seven  headed  by  Francis  Deak.  The  Hungarian  budget 
was  to  be  entirely  independent  of  that  of  Austria  in  all  in- 
ternal affairs  except  those  affecting  the  army.  The  officials 
of  the  bank  regarded  their  interest  as  fully  protected  in  both 
Austria  and  Hungary  by  the  law  of  1862,  but  the  bank  soon 
found  its  rights  in  Hungary  called  in  question  and  sought  a 
new  arrangement  which  would  place  them  beyond  attack. 
The  Hungarian  Diet  passed  a  vote  early  in  1870,  promising 
recognition  to  the  bank  until  the  expiration  of  its  privileges 
in  1876,  if  the  bank  would  consent  to  a  payment  to  Hungary 
in  the  same  proportion  as  that  made  to  Austria,  and  if  it 
would  establish  at  Buda-Pesth  an  independent  directorate 
for  Hungary.  The  bank  was  willing  to  make  a  payment  of 
4,500,000  florins,  but  this  was  not  acceptable  to  the  Hun- 
garian cabinet  and  the  privileges  of  the  bank  approached 
expiration  without  an  agreement.  The  Imperial  government 


THE  AUSTRO-HUNGARIAN  BANK.  233 

then  brought  forward  a  plan  for  terminating  the  existence 
of  the  National  Bank  of  Austria  and  substituting  in  its 
place  a  new  institution  to  be  known  as  the  Austro-Hungarian 
Bank.  The  proposition  became  law  and  the  new  institution 
was  established  for  a  term  beginning  July  i,  1878,  and  end- 
ing December  31,  1887.  The  charter  was  afterwards  re- 
newed for  a  period  of  ten  years  ending  on  December  31,  1897. 

The  new  bank  succeeded  to  all  the  transactions  of  the  old 
and  a  directorate  was  established  at  Buda-Pesth  and  a  sum 
of  50,000,000  florins  ($25,000,000)  set  aside  for  discounts 
and  advances  in  Hungary.  The  bank-notes  of  the  institu- 
tion are  required  to  be  printed  in  both  the  German  and 
Hungarian  tongues  and  to  bear  the  arms  of  the  monarchy. 
The  governor  of  the  bank  is  named  by  the  Bmperor,  upon 
the  joint  nomination  of  the  finance  ministers  of  Austria  and 
Hungary,  and  the  two  deputy  governors  are  chosen  from  the 
two  parts  of  the  Empire.  The  changes  made  in  the  pro- 
visions for  the  note  circulation  had  in  view  the  new  charac- 
ter of  the  bank  as  a  representative  of  the  two  monarchies  and 
the  purpose  of  the  government  to  resume  specie  payments. 
The  certificates  and  matured  coupons  of  the  Austrian  and 
Hungarian  debt  were  included  among  the  legal  securities 
for  the  covered  circulation  and  it  was  provided  that  the  two 
principal  establishments  at  Vienna  and  Buda-Pesth  might 
issue  bills  on  deposits  of  silver  coin  and  bullion  at  the  rate 
of  forty-five  florins  to  the  pound  of  fine  silver.  This  pro- 
vision became  inoperative  when  the  government  in  1879 
suspended  the  coinage  of  silver  on  private  account. 

The  amount  of  200,000,000  florins  has  been  steadily  ad- 
hered to  as  the  limit  of  the  uncovered  circulation,  but  the 
rule  is  now  followed  of  keeping  coin  and  foreign  gold  bills 
to  the  amount  of  forty  per  cent,  of  the  entire  volume  of 
bank-notes  in  the  hands  of  the  public.  The  difficulties 
caused  by  a  rigid  limit  of  circulation  in  1873  were  guarded 
against,  upon  the  extension  of  the  bank  charter  in  1887,  by 
the  adoption  of  the  German  system  of  the  five  per  cent,  tax 
on  the  circulation.  The  method  of  determination  is  sub- 
stantially the  same  as  in  the  case  of  the  German  Imperial 


234          HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

Bank.  Weekly  reports  are  required,  and  upon  the  amount 
by  which  the  aggregate  circulation  exceeds  the  sum  of  the 
metallic  reserve  and  the  uncovered  circulation  of  200,000,000 
florins,  a  tax  is  levied  of  -£$  of  one  per  cent,  for  the  weekly 
excess.  The  notes  of  the  Austro-Hungarian  Bank  are  a 
legal  tender  throughout  the  Empire  for  their  full  nominal 
value  in  all  payments  to  be  made  in  Austrian  money,  in  the 
absence  of  a  specific  contract  or  a  judicial  decision  requiring 
payment  in  specie.1 

Political  conflicts  between  Austria  and  Hungary  embar- 
rassed the  bank  and  delayed  the  complete  restoration  of 
specie  payments  which  was  undertaken  in  1892.  It  was 
only  by  temporary  conventions  that  the  life  of  the  bank 
was  extended  from  1897  to  I^99»  an^  even  the  extension  of 
the  charter  in  the  latter  year  to  1910  was  limited  by  the 
proviso  that  if  the  union  between  the  two  countries  should 
terminate  at  the  close  of  1906,  the  privilege  of  the  bank 
should  terminate  also.3  A  more  distinctly  political  character 
was  given  to  the  organization  of  the  bank  by  the  enlargement 
of  the  power  of  the  governor,  the  provision  that  the  general 
council  should  be  composed  of  equal  numbers  of  Austrian 
and  Hungarian  subjects,  and  the  requirement  that  the  sessions 
of  the  council  should  take  place  alternately  at  Vienna  and 
at  Buda-Pesth.  Even  this  arrangement,  coupled  with  many 
new  restrictions  upon  the  bank,  was  threatened  for  a  time 
by  the  refusal  of  the  Commission  on  the  Debt  to  pay  over  to 
the  bank  the  amounts  contemplated  by  the  agreement  for 
the  retirement  of  the  government  paper  money,  but  the 
danger  was  averted  by  a  change  of  ministry.8  The  payment 
was  made  by  the  Witteck  ministry  and  the  arrangement 
went  into  force. 

The  essential  steps  towards  the  resumption  of  specie  pay- 
ments in  Austria- Hungary  were  taken  by  the  monetary  laws 
of  1892.  The  ministers  of  finance  of  the  two  parts  of  the 

'Noel,  I.,  458. 

*  Economise  Europeen,  June  23,  1899,  XV.,  794. 

jRaffalovich,  Le  Marche  Financier  en  1899-1 900,  550. 


THE  AUSTRO-HUNGARIAN  BANK.  2}$ 

Empire  on  February  26,  1892,  invited  a  number  of  eminent 
financiers  and  political  economists  to  meet  and  consider  the 
following  questions : 

1.  What  standard  ought  to  be  adopted  when  the  currency 
is  reformed  ? 

2.  In  case  of  the  adoption  of  the  gold  standard,  should  a 
limited  circulation  of  silver  money  be  admitted  and  to  what 
amount  ? 

3.  Is  the  circulation  of  government  notes  advisable,  bear- 
ing no  interest,  redeemable  in  legal  money  and  not  made  a 
forced  legal  tender,  and  under  what  conditions  ? 

4.  According  to  what  principles  should  the  conversion  into 
gold  of  the  existing  florin  be  regulated  ? 

5.  What  monetary  unit  is  it  advisable  to  choose  ? 

The  inquiry  in  Austria  was  entrusted  to  a  commission  of 
thirty-six  persons,  under  the  presidency  of  Herr  Steinbach, 
the  Minister  of  Finance,  and  the  sittings  continued  from 
March  8th  to  March  lyth.  The  inquiry  in  Hungary  was 
made  by  a  commission  of  twenty-one  under  the  presidency 
of  Herr  Wekerle.  The  first  question  was  answered  by  a 
large  majority  in  favor  of  the  gold  standard.  The  second 
question  led  to  a  greater  division  of  opinion,  but  the  majority 
seemed  disposed  to  favor  as  large  a  use  of  silver  as  was  com- 
patible with  the  absolute  maintenance  of  the  gold  standard. 
The  majority  also  favored  the  continuance  of  a  circulation 
of  50,000,000  to  100,000,000  florins  in  government  notes  not 
fully  covered  by  coin.  A  few  believers  in  a  strictly  metallic 
currency  opposed  any  such  use  of  paper  money,  and  argued 
that  its  continuance  would  shake  confidence  in  the  monetary 
system.  The  fifth  question  was  answered  in  favor  of  the 
maintenance  of  the  florin  or  its  division  into  two  parts,  if 
a  smaller  unit  were  desired.  The  answer  to  the  fourth 
involved  the  old  controversy  regarding  the  effects  of  the 
restoration  of  a  metallic  standard  after  business  had  been 
conducted  and  contracts  made  for  many  years  on  a  depre- 
ciated paper  basis.  The  definite  answer  to  this  and  the  other 
questions  was  finally  given  by  the  government,  without  fol- 
lowing in  all  respects  the  recommendations  of  the  commission. 


HISTORY  OF  MODERN  BANKS   OF  ISSUE. 

The  proposals  of  the  ministry  were  submitted  to  the  Par- 
liament of  both  countries  on  May  14,  1892,  and  were  made 
law  throughout  the  Empire  on  August  nth.  The  crown 
(kronen)  was  made  the  monetary  unit  upon  the  basis  of 
cutting  a  kilogram  of  fine  gold  into  3280  crowns,  and  a 
kilogram  nine- tenths  fine  into  2952  crowns.  The  value  of 
the  new  coin  in  United  States  money  is  20.3  cents  or  about 
one-twentieth  more  than  the  French  franc.  The  crown  was 
divided  into  100  heller,  and  gold  pieces  of  ten  and  twenty 
crowns  were  ordered  to  be  coined.  Austrian  ducats  were 
still  authorized  to  be  coined  as  money  of  commerce,  but  the 
coinage  of  pieces  of  four  and  eight  florins  under  the  terms 
of  the  treaty  with  France  was  discontinued.  Silver  pieces 
were  provided  for  of  one  crown  ($0.203)  and  of  fifty  heller 
($0.1015)  an(i  nickel  and  bronze  pieces  of  smaller  denomina- 
tions. The  silver  pieces  were  to  contain  only  835  parts 
silver  in  1000  parts,  making  them  substantially  token  coins, 
and  their  legal  tender  quality  was  limited  to  fifty  crowns 

($10).' 

The  government  decided  to  convert  the  paper  money  at 
the  rate  of  one  florin  for  two  crowns.  This  was  the  rate 
which  was  under  discussion  by  the  commission,  and  while 
it  adhered  pretty  closely  to  the  current  rate  of  exchange  it 
involved  a  reduction  of  the  nominal  value  of  the  paper  in 
gold  about  sixteen  per  cent.2  It  had  been  urged  by  several 
members  of  the  commission  that  it  was  desirable  to  convert 
foreign  obligations  upon  the  basis  of  parity  in  gold,  in  order 
to  maintain  the  public  credit,  even  if  it  were  more  just  to 
convert  the  money  of  domestic  circulation  at  the  rates  which 
had  ruled  for  a  dozen  years.3  The  problem  of  conversion 
was  complicated  by  the  fact  that  the  Austrian  metallic 
standard,  so  far  as  there  had  been  any,  had  been  silver  rather 


1  Ordinance  of  August  8,  1892,  Bulletin  de  Statistique,  Sept.,  1892, 
XXXII.,  318-22. 

2  Two  crowns  being  worth  40.6  cents,  their  even  exchange  for  one 
florin,  nominally  worth  48.2  cents,  left  a  reduction  of  7.6  cents  in  the 
value  of  the  florin,  which  is  about  i6per  cent. 

3  Raflfalovich,  Le  Marche  Financier  en  1892,  96. 


THE  AUSTRO-HUNGARIAN  BANK.  237 

than  gold  and  many  obligations  were  specifically  payable  in 
silver.  The  suspension  of  silver  coinage  on  private  account 
in  1879  gave  a  fictitious  value  to  Austrian  silver  coins,  just 
as  it  was  attempted  by  the  British  government  to  give  such 
a  value  to  Indian  rupees  in  1893,  and  the  florin  ceased  to 
fluctuate  with  the  silver  bullion  market  while  remaining 
below  both  gold  and  paper.  The  government  did  not  in 
1879,  however,  abandon  the  silver  standard  and  from  1879 
to  1891  coined  not  less  than  125,500,000  silver  florins  at  the 
mints  of  Vienna  and  Kremnitz.  The  rate  of  conversion 
adopted  for  the  paper  currency,  therefore,  was  not  exactly 
the  scaling  of  a  gold  obligation,  for  gold  only  became  the 
standard  on  the  date  that  the  rate  of  conversion  was  fixed. 
The  rate  represented  about  the  average  exchange  from  1879 
to  1891.' 

The  bank  was  required  to  establish  gold  payments  upon 
the  basis  of  the  new  rate  of  exchange.  The  result  was  a 
considerable  benefit  to  the  bank,  for  it  had  in  its  vaults  on 
August  7,  1892,  59,757,000  florins  in  gold  and  20,428,000 
florins  in  foreign  bills  payable  in  gold,  which  at  the  new 
rate  acquired  a  higher  nominal  value.  The  bank  carried 
I3)500J°00  florins  in  foreign  bills  to  its  special  reserve  fund, 
and  was  still  able  on  August  i5th  to  report  a  cash  reserve  of 
70,666,000  florins,  including  619,876  florins  received  during 
the  preceding  week,  and  foreign  bills  in  hand  payable  in 
gold,  to  the  amount  of  10,404,000  florins.2  The  addition  was 
made  to  the  special  reserve  fund  in  order  to  avoid  increas- 
ing the  limit  of  covered  note  issues,  which  was  not  thought 
advisable  without  consultation  with  the  government.  The 
entire  operation  was  simply  a  matter  of  bookkeeping  and 
added  nothing  to  the  real  resources  of  the  bank  or  to  the 
value  of  its  gold.  The  gold  had  formerly  been  counted  at 
its  face  value,  while  its  real  value,  expressed  in  terms  of 
depreciated  paper,  was  much  greater.  The  change  simply 
recognized  this  fact  and  in  bringing  the  gold  and  papei 


1  Haupt,  58-64. 

2  Le  Marchb  Financier  en  1892,  102. 


238         HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

together  gave  a  nominal  value  to  the  former  corresponding 
to  the  reduced  standard.  The  purchasing  power  of  a  given 
weight  of  gold  remained  the  same  under  either  method  of 
bookkeeping,  but  the  gold  was  intended  to  become  under  the 
new  system  a  money  of  actual  circulation  instead  of  a  bullion 
reserve  expressed  in  a  standard  above  the  real  one. 

The  importation  of  gold  followed  quickly  on  the  estab- 
lishment of  the  standard  and  was  promoted  by  the  policy 
of  the  bank,  which  raised  the  discount  rate  and  made 
advances  to  facilitate  arbitrage  transactions  when  exchange 
seemed  to  be  unfavorable.  The  receipts  of  gold  by  the 
bank  from  April  nth  to  October  10,  1892,  were  38,759,000 
florins  ($19,000,000),  of  which  a  large  part  was  in  pieces  of 
American  origin.  Receipts  from  India  became  heavy  in 
November  and  raised  the  total  receipts  from  August  nth, 
the  date  of  the  promulgation  of  the  new  laws,  to  December 
31,  1892,  to  39,447,000  florins.  The  state  also  availed  itself 
of  foreign  bills  in  its  possession  to  accumulate  gold  and  at 
the  close  of  1892  had  about  40,000,000  florins  in  the  hands 
of  the  Austrian  ministry  and  50,000,000  florins  in  the  hands 
of  the  Hungarian  ministry.  A  new  project  was  adopted 
in  1894  f°r  retiring  the  government  paper  money  and  sub- 
stituting bank-notes  and  subsidiary  silver.  An  arrangement 
was  made  with  the  Austro-Hungarian  Bank  to  sell  40,000,- 
ooo  florins  in  silver  for  coinage  into  pieces  of  one  crown  and 
to  issue  160,000,000  florins  in  bank-notes  as  the  government 
notes  were  received  and  cancelled.  The  Treasury  agreed  to 
pay  over  to  the  bank  200,000,000  florins  in  gold  ($100,000,- 
ooo),  which  was  to  be  used  only  as  the  coin  guarantee  of  the 
new  notes,  florin  for  florin.  The  first  notes  retired  were 
those  of  one  and  five  florins  and  considerable  opposition 
developed  among  the  people  at  surrendering  the  convenient 
paper  notes  for  the  more  cumbersome  silver.  An  economist 
of  note,  Max  Wirth,  urged  that  the  retirement  of  paper 
should  begin  with  notes  of  50  florins  ($25)  instead  of  the 
small  notes,  but  the  government  adhered  to  its  original  plan.1 


1  Raffalovich,  Marche  Financier  en  1893-4^  113. 


THE  AUSTRO-HUNGARIAN  BANK. 

The  crisis  of  1893  in  the  United  States  and  the  rather 
unfavorable  condition  of  the  money  market  in  Germany 
had  a  reflex  influence  upon  Austria  which  arrested  her  steps 
towards  a  gold  basis  and  prevented  any  considerable  increase 
in  her  gold  fund  during  that  year.  The  reappearance  of  a 
premium  on  gold,  running  from  three  to  seven  per  cent.,  in 
paper  money  and  bank  notes,  caused  a  deal  of  disappoint- 
ment and  much  inquiry  as  to  the  reason.  The  critics  of  the 
government  ascribed  it  to  the  attempt  to  convert  the  old  five 
per  cent,  obligations  into  four  per  cents.,  which  resulted  in 
bringing  back  into  Austria  a  large  quantity  of  securities 
held  abroad.  It  was  calculated  that  the  importations  of 
securities  during  1893  exceeded  the  exports  by  114,690,000 
florins  ($57,ooo,ooo).1  The  Minister  of  Finance  pointed  out 
that  this  inward  current  was  almost  wholly  in  securities 
payable  in  silver  and  that  it  was  necessary  to  cut  the  bond 
which  nominally  bound  the  two  metals  together  in  the 
Austrian  currency  system.  A  reason  was  found  for  the 
change  in  some  quarters  in  the  state  of  the  money  market 
at  Berlin,  which  was  swamped  with  South  American  and 
other  securities  of  little  value,  which  had  absorbed  the 
ready  money  of  German  capitalists.  The  Austrian  securi- 
ties were  among  the  few  of  real  value  which  were  held  in 
Germany,  and  money  could  be  recovered  at  the  smallest  loss 
by  returning  them  to  Austria,  whose  people  were  buying 
their  own  securities  at  good  prices.  This  tendency,  though 
doubtless  heightened  in  the  case  of  Austria  by  the  conver- 
sions and  by  the  fear  of  payment  in  silver,  only  confirmed  a 
principle  which  has  become  marked  in  recent  years — that 
the  securities  issued  by  a  solvent  power  tend,  after  their 
original  placement,  to  return  into  the  hands  of  its  own 
people.  This  was  observed  in  the  United  States  in  1878, 
when  it  was  estimated  that  five-sixth  of  the  public  debt  had 
returned  into  the  hands  of  Americans  ;  in  France,  after  the 
great  loans  to  pay  the  German  war  indemnity ;  and  even 
in  Italy,  who  originally  paid  two-thirds  of  her  interest 


1  Neue  Freie  Presse,  January  i,  1894. 


240  H1STOR  Y  OF  MODERN  BANKS  OF  ISSUE. 

charges  abroad,  but  now  pays  hardly  a  fifth  outside  the 
Kingdom . l 

The  new  monetary  system,  by  which  the  gold  crown 
($0.203)  became  the  unit  of  value,  went  into  operation  in 
1900.  The  sum  of  112,000,000  florins  ($22,736,000)  in  gov- 
ernment bills  was  gradually  replaced,  with  the  help  of  the 
bank,  by  5-crown  pieces  in  silver  and  new  bank  notes.  The 
bank  received  from  the  Treasury  224,000,000  crowns  in  new 
gold  pieces  of  20  crowns,  which  exactly  equalled  the  out- 
standing government  notes,  and  afforded  a  complete  cover 
for  64,000,000  crowns  in  5-crown  pieces  and  160,000,000 
crowns  in  lo-crown  notes.  Of  this  deposit  the  government 
of  Austria  paid  156,800,000  crowns  and  that  of  Hungary 
67,200,000  crowns.2  The  circulation  of  old  notes  ceased  to 
be  permitted  after  September  i,  1901,  and  the  notes  ceased 
to  be  legal  tender  after  February  28,  1903.  Already  by  the 
first  of  October,  1902,  the  amount  outstanding  had  fallen  to 
6,500,000  crowns  ($1,319,500),  and  the  gold  in  circulation 
early  in  1903  consisted  of  35,980,510  crowns  in  lo-crown 
pieces  and  103,923,160  in  pieces  of  20  crowns  ($4.06).  By 
the  close  of  1903  the  gold  resources  of  the  bank  were  1,250,- 
000,000  crowns  and  afforded  a  cover  of  86  per  cent,  for  an 
outstanding  circulation  of  1,550,000,000  crowns.  Only  po- 
litical differences  between  the  different  parts  of  the  Dual 
Monarchy  stood  in  the  way  of  a  mandatory  law  compelling 
the  redemption  of  bank-notes  in  gold  on  demand.8 


1  Vide  infra,  28. 

2  Raffalovich,  Le  MarchZ  Financier  en  igo2-igos^  817.    The  eco- 
nomic effect  of  these  operations  is  thus  described  by  Willis  :  "  It  was 
sought  to  transform  the  legal-tender  notes  into  bank  notes  and  then 
to  provide  for  their  management  upon  banking  principles.     In  this 
way  the  volume  of  the  circulation  would  not  be  disturbed.     The 
means  of  obtaining  the  bank  notes  for  the  redemption  of  the  legal 
tenders  were,  however,  in  this  case  thoroughly  sound." — "The  Aus- 
trian Monetary  Reform,"  in  Sound  Currency,  August,  1899,  VI.,  127. 

3  One  of  the  grounds  of  indifference  in  Austria  was  the  feeling  that 
resumption  of  specie  payments  would  enable  Hungary  to  emancipate 


THE  AUSTRO-HUNGARIAN  BANK.  241 

Control  of  the  foreign  exchanges  was  the  capstone  of  the 
structure  of  gold  redemption,  and  this  could  not  be  attained 
while  the  government  kept  its  gold  resources  with  private 
bankers  and  relied  upon  them  to  meet  its  obligations  abroad. 
This  was  the  condition  prevailing  down  to  the  summer  of 
1901,  when  Count  von  Bilinski,  the  governor  of  the  bank, 
after  much  previous  negotiation,  arranged  a  meeting  on 
August  8th,  at  his  home  at  Ischl,  with  the  finance  ministers 
of  the  two  governments.  It  was  then  agreed  that  the  public 
deposits  should  be  transferred  from  the  Rothschilds  and 
other  private  bankers  to  the  Austro-Hungarian  Bank,  and 
that  the  latter  should  not  only  attend  to  government  pay- 
ments abroad,  but  should  furnish  exchange  freely  for  private 
parties  and  should  begin  the  tentative  issue  of  gold  coins 
in  the  interior.1  It  was  a  complex  and  delicate  task  and 
involved  several  changes  in  the  organization  of  the  bank. 
Among  other  measures  gold  customs  drafts  were  issued  by 
the  bank  in  exchange  for  foreign  and  domestic  gold  coin, 
thereby  economizing  the  movement  of  gold  and  transferring 
disputes  as  to  the  value  of  foreign  coins  from  the  customs 
offices  to  the  bank.8 

These  measures  were  eminently  successful  in  maintaining 
parity  of  exchange  with  gold  countries  and  in  enhancing 
the  volume  of  business  and  the  financial  importance  of  the 
bank.  Within  about  five  years  gold  was  paid  out  to  the 
amount  of  1,250,000,000  crowns,  of  which  four-fifths  came 
back  to  the  bank  and  one -fifth  remained  in  the  domestic 
circulation.  Operations  in  foreign  exchange  in  1900,  prior 
to  the  Ischl  agreement,  were  ^52, 000,000  in  English  money, 
270,100,000  francs  in  French,  and  1,047,700,000  marks  in 
German  money.  Transactions  in  French  and  German  money 
had  more  than  doubled  in  1906,  and  in  the  stress  of  1907  the 


herself  entirely  in  financial  matters  from  Austria. — Raffalovich,  Le 
Marche  Financier  en  1901-02,  614. 

1  Economiste  Europeen,  April  24,  1908,  XXXIII.,  516. 

2  Ibid,,  May  i,  1908,  XXXIII.,  549. 

16 


242         HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

total  of  exchange  operations  reached  2,966,300,000  crowns 
($602,000,000)  and  the  bank  was  able  to  congratulate  its 
shareholders  that  it  was  able  to  maintain  a  discount  rate 
of  six  per  cent.,  while  higher  rates  prevailed  in  the  countries 
around  it.1 

The  action  of  the  government  in  buying  silver  for  sub- 
sidiary coinage  from  the  bank  proved  a  great  aid  to  the 
latter  in  solving  the  problem  what  to  do  with  its  large  stocks 
of  silver  accumulated  when  that  metal  was  near  the  old 
parity  with  gold.  The  cash  reserves  of  the  National  Bank 
of  Austria  and  of  the  Austro-Hungarian  Bank  consisted 
almost  exclusively  of  silver  while  that  metal  was  at  a  pre- 
mium over  gold,  but  gold  began  to  flow  into  the  bank  in 
1871,  and  soon  came  to  constitute  about  half  the  reserve. 
The  gold  then  remained  nearly  stationary  in  amount  for  ten 
years,  while  the  silver  rapidly  increased.  This  difficulty  has 
not  been  serious  in  recent  years,  and  the  gold  stock  has  come 
to  exceed  the  silver  by  about  four  times.  The  gold  held  at 
the  close  of  1906  was  1,112,263,245  crowns,  and  decreased 
to  the  close  of  1907  only  to  1,099,393,421  crowns  ($223,150,- 
ooo).  The  silver  stock  decreased  during  the  same  interval 
from  282,055,904  crowns  to  281,485,199  crowns  ($57,130,000). 
In  spite  of  the  change  in  the  monetary  unit,  computation  in 
florins  long  lingered  in  Austria.  It  was  encouraged  by  the 
continued  use  of  the  silver  pieces  of  one  florin,  of  which  the 
bank  possessed  a  large  stock.  It  was  decided  early  in  1908 
to  discontinue  the  issue  of  silver  florins  and  to  coin  at  once  a 
large  part  of  those  in  the  reserves  of  the  bank  into  pieces 
of  one  crown.2 

The  proportions  of  gold  and  silver  held  and  other  sta- 
tistics of  the  bank,  before  the  change  in  the  monetary  unit, 
appear  in  the  following  table ; 


1  Generalversammlung  der  Oesterreichisch-Ungarischen  Bank  am 
3  Februar,  jpo8,  xviii. 

2  U.  S.  Consular  Reports,  August  12,  1908,  14. 


THE  AUbTRO-HUNGARIAN  BANK. 


243 


YEAR. 

SPECIE  RESERVE. 
DEC.  3IST. 
GOLD.                     SILVER. 

MEAN  CIRCU- 
LATION. 

MEAN  CURRENT 
ACCOUNTS. 

MEAN  DIS- 
COUNTS. 

1865 

1-5 

(In  millions 
120.0 

of  florins.) 
350.0 

1-3 

_ 

1870 

1.4 

II2.9 

296.8 



1875 

67.8 

66.5 

286.2 

i-5 



1880 

65.0 

108.3 

316.6 

1-4 

II3-4 

I883 

77-7 

121.7 

457-7 

1.9 

144.2 

1884 

78.8 

126.6 

358.4 

2.1 

136.4 

1885 

69.1 

129.7 

347-4 

2.7 

II7-5 

1887 

71.0 

I45.I 

366.0 

2.2 

I29.I 

1888 

59-° 

154.0 

384.6 

5.6 

14L7 

I889 

54-3 

162.2 

399-3 

7.2 

149.2 

l8gO 

54-0 

165-5 

415.6 

7-3 

156.7 

1892 

103.2 

168.9 

425.9 

8.3 

I5L2 

1893 

IOT.8 

161.9 

464.0 

ii.  i 

168.3 

1894 

155.3 

139.2 

458.9 

10.7 

I5I.6 

l895 

244.0 

126.6 

527.4 

11.  1 

164.3 

1896 

302.1 

125-7 

587.6 

10.3 

159-8 

I898 

359.4 

123.9 

657.5 

12.3 

175.0 

I899 

393-0 

1  06.0 

676.4 

17.9 

185.5 

The  capital  of  the  bank  was  changed,  when  the  new 
monetary  system  took  effect  in  1900,  to  210,000,000  crowns 
($42,630,000).  The  increase  from  180,000,000  crowns  was 
accomplished  by  transferring  30,000,000  crowns  from  surplus, 
which  was  thus  reduced  to  6,514,000  crowns,  but  was  gradu- 
ally built  up  again  to  15,305,349  crowns  at  the  close  of  1907. 
The  principal  accounts  of  the  bank  under  the  new  monetary 
unit  are  shown  in  the  following  table  : 

Accounts  of  the  Ausiro- Hungarian  Bank,  1900-1913. 


DEC.  31. 

NOTES. 

METALLIC 
RESERVE. 

DISCOUNTS. 

MORTGAGE 
LOANS. 

(In  the 

usands  of  crowns  - 

=  $0.203.) 

1900 

1,494,023 

,218,100 

455,501 

299,6l6 

1901 

1,584,934 

,448,070 

335,055 

299,830 

1902 

1,635,186 

,465,160 

345,176 

298,987 

1903 

1,770,847 

,462,411 

400,258 

298,520 

1904 

1,751,301 

,507,560 

5H,637 

288,424 

1905 

1,846,992 

,425,069 

641,273 

283,086 

1907 

2,022,521 

1,440,878 

748,068 

299,993 

1909 

2,188,040 

1,713,018 

687,784 

299,983 

I9IO 

2,375,938 

1,669,168 

889,087 

298,346 

1912 

2,815,797 

1,507,575 

1,341,107 

299,454 

1913 

2,493,641 

1,562,518 

925,998 

299,885 

244         HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

The  circulation  of  the  bank  varies  widely  at  different 
seasons.  The  degree  of  pressure  for  currency  is  indicated 
by  the  record  of  occasions  on  which  notes  have  been  issued 
in  excess  of  the  authorized  limit  and  subject  to  the  five  per 
cent.  tax.  These  occasions  were  more  or  less  exceptional  down 
to  the  close  of  1905.  During  eighteen  years  ending  with 
that  year, — a  period  of  864  weeks, — excess  issues  appeared 
in  fifty-five  weeks,  some  of  them  for  very  small  amounts. 
Of  these  issues  twenty- three  occurred  in  the  month  of  Oc- 
tober, which  is  the  harvest  month. l  The  first  occasion  was 
in  the  autumn  of  1890,  when  the  limit  was  exceeded  656,- 
440  florins  in  the  week  of  October  yth,  and  the  excess  rose 
to  23,257,080  florins  during  the  week  of  October  3ist.  The 
excess  of  circulation  declined  to  17,093,710  florins  in  the 
following  week  and  disappeared  in  the  week  of  November 
1 4th.  The  pressure  was  felt  more  severely  in  later  years 
and  especially  in  1907,  when  there  were  twenty-two  weeks 
of  excess  circulation,  and  after  August  23d,  issues  were  con- 
tinuously above  the  authorized  limit.  The  highest  excess 
was  in  the  week  ending  October  3ist,  when  the  amount  was 
242,067,000  crowns  ($49,125,000).  Then  began  a  gradual 
improvement,  which  carried  the  excess  down  on  December 
i5th  to  25,074,000  crowns,  to  be  advanced  again  temporarily 
by  the  end-of-the-year  demand  for  currency,  which  carried 
the  excess  circulation  on  December  31,  1907,  to  187,145,- 


1  Letter  of  the  Governor  of  the  bank  to  the  New  York  Chamber  of 
Commerce,  July  22,  1906.  In  this  letter  Count  von  Bilinski  declared 
that  "the  system  of  note  taxation  exerted  no  decided  influence  upon 
the  discount  policy  of  the  bank,  inasmuch  as  the  Council  of  Adminis- 
tration, after  careful  consideration  of  all  circumstances,  had  occasion 
to  raise  its  discount  rate  repeatedly  during  times  when  the  limitation 
of  its  note  issue  had  not  been  reached ;  and  also  on  several  occasions 
when  its  limitations  were  reached,  it  maintained  a  discount  rate  lower 
than  the  legal  five  per  cent.  rate.  Thus  the  cost  of  the  tax  was  not 
borne  by  its  clients,  but  by  the  bank  itself."—  The  Currency:  Report 
by  the  Special  Committee  of  the  Chamber  of  Commerce  of  the  State  of 
New  York,  43. 


THE  AUSTRO-HUNGARIAN  BANK. 


245 


ooo  crowns.  The  range  of  variation  in  the  circulation  before 
the  change  in  the  monetary  unit  is  indicated  by  the  following 
figures  for  representative  years : 

Fluctuations  in  Circulation. 

(In  thousands  of  florins.) 


YKAR.         |        MAXIMUM. 


OUTSTANDING  DEC.  3IST. 


1890 
1892 

1894 
1896 
1898 
1899 

471,376 
491,709 
517,742 
668,009 

741,914 
736,408 

387,888 

381,371 
409,349 
536,832 

606,952 
636,302 

415,570 
425,959 
458,911 
587,656 
657,523 
676,413 

445,934 
477,987 
507,808 
569,726 

737,475 
728,981 

Substantially  the  same  range  of  variation  has  prevailed 
since  the  adoption  of  the  crown  as  the  unit  of  value  and  the 
practical  restoration  of  stable  exchange.  In  the  year  1907 
the  circulation  at  the  beginning  of  the  year  was  1,982,037,000 
crowns  ($402, 300, ooo)  from  which  it  fell  gradually  to  a  mini- 
mum of  1,709,004,000  crowns  ($346,900,000)  on  March  23d. 
From  that  date  the  demand  for  additional  notes  increased 
only  slowly  until  September  23d,  when  the  amount  was  1,871,- 
917,800  crowns.  Then  began  the  rapid  upward  movement 
caused  by  the  combined  influence  of  the  autumn  crop  move- 
ment and  the  disturbances  in  the  money  markets  of  the 
world,  which  carried  the  circulation  on  September  3oth  to 
2,001,892,000  crowns  and  on  October  3ist  to  2,070,293,000 
crowns  ($420,200,000), — the  maximum  of  the  year.  From 
this  point  there  was  a  gradual  decline  to  1,865, 210,000  crowns 
($378, 600,000)  on  December  i5th,  until  the  usual  movement  at 
the  end  of  the  year,  which  left  the  amount  of  notes  outstand- 
ing on  December  3ist  at  2, 028, 024, ooo  crowns  ($41 1,600,000). 

About  one- third  of  the  amount  of  the  notes  are  for  20 
crowns  ($4. 06).  The  number  of  these  on  December  31,  1907, 
was  32,978,829  out  of  notes  outstanding  to  the  number  of 
59,968,201,  and  their  value  was  659, 576, 580  crowns  ($133,- 
875,000).  Notes  of  other  denominations  were  357,188  for 


246         HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

1000  crowns,  6, 189, 182  for  100  crowns,  4,604,357  for  50  crowns, 
and  a  small  number  in  old  notes  in  process  of  retirement. ' 

The  volume  of  discounts  fluctuates  in  much  the  same 
manner  as  the  note  circulation.  The  maximum  of  1907 
was  865,223,000  crowns  ($175,630,000)  on  October  3ist,  the 
minimum  was  525,410,000  crowns  ($106,650,000)  on  Feb- 
ruary 23d,  and  the  average  for  the  year  was  666,309,000 
crowns.  As  in  other  European  banks  of  issue,  the  greater 
part  of  the  paper  held  is  of  even  shorter  maturities  than  is 
required  by  the  statutes.  Thus,  of  the  amount  held  at  the 
close  of  1907,  468,849,397  crowns,  or  62.67  per  cent,  of  the 
whole,  matured  during  January,  1908,  and  25.47  P61"  cent, 
during  February,  leaving  only  n.86  to  run  longer  than  two 
months. 

The  rate  of  discount  of  the  National  Bank  varied  between 
1817  and  1862  from  five  to  eight  per  cent.,  and  from  1863  to 
the  fusion  with  "the  Austro-Hungarian  Bank  in  1878  never 
went  higher  than  six  and  a  half  per  cent.  The  changes  in 
the  rate  of  discount  during  these  fifteen  years  were  twelve, 
while  those  of  the  Bank  of  Kngland  were  one  hundred  and 
fifty-two,  of  the  Bank  of  France  forty-six,  and  of  the  Bank 
of  Prussia  forty-five.  The  mean  rate  of  the  National  Bank 
of  Austria  was  not  more  than  eight-tenths  of  a  cent,  above 
that  of  the  Bank  of  Kngland  nor  more  than  seven-tenths 
above  that  of  the  Bank  of  France,  in  spite  of  the  much  more 
complete  industrial  development  of  the  latter  countries.8 
The  rate  has  varied  even  less  during  the  more  recent  history 
of  the  consolidated  bank.  Fixed  at  four  per  cent,  on  May  9, 
1879,  it  was  raised  to  five  per  cent.  October  20,  1882,  reduced 
to  four  and  a  half  on  February  3,  1883,  and  to  four  per  cent. 
on  February  23,  1883.  The  rate  was  raised  again  to  four 
and  a  half  on  October  7,  1887,  and  reduced  to  four  per  cent, 
on  January  n,  1888.  The  rate  of  four  per  cent,  was  pretty 
uniformly  maintained  during  the  early  part  of  the  year  for 

1  Generalversammlung  der  Oeslerreichisch-Ungarischen  Bank  am 
3  Februar  1908,  6. 
9  Noel,  I.,  382,  434. 


THE  AUSTRO-HUNGARIAN  BAAJf.  247 

some  years,  but  the  autumn  rate  was  usually  higher,  reach- 
ing in  1890  five  and  a  half  per  cent.  An  increase  from  four 
to  five  per  cent,  was  made  on  October  7,  1893,  but  was  fol- 
lowed by  a  reduction  to  four  and  a  half  in  the  second  half  of 
January,  1894,  and  to  four  per  cent,  on  February  9th,  where 
it  remained  throughout  the  year  and  until  the  autumn  of 
1895,  when  it  was  put  at  five  per  cent. 

Reductions  were  made  in  the  winter,  which  brought  the 
rate  down  on  February  14,  1896,  to  four  per  cent.,  where  it 
was  successfully  maintained,  through  the  elasticity  of  the 
note  system,  until  the  autumn  of  1898.  The  scarcity  of 
capital,  which  then  afflicted  Europe  as  the  result  of  the 
war  in  South  Africa  and  of  other  causes,  forced  the  rate  of 
discount  at  the  Austro-Hungarian  Bank  to  four  and  a  half 
per  cent,  on  October  14,  1898,  and  to  five  per  cent,  on  No- 
vember 25th.  High  rates  prevailed,  with  slight  relaxations, 
until  the  spring  of  1901,  when  it  became  possible  on  March 
ist  to  reduce  the  rate  to  four  per  cent,  and  in  1902,  on  Feb- 
ruary 5th,  to  three  and  a  half  per  cent. ,  for  the  first  time  in  the 
history  of  the  bank.  This  rate  remained  unchanged  for 
more  than  three  years,  when  the  pressure  again  felt  upon 
the  world's  stock  of  capital  led  to  an  advance  on  October  19, 
1905,  to  four  and  a  half  per  cent.  Kven  then  the  advance 
was  attributed  at  first  to  the  attraction  for  Austrian  gold  which 
was  afforded  by  high  rates  in  foreign  markets,  but  it  pres- 
ently appeared  that  there  was  real  pressure  at  home  as  well 
as  abroad. 1  Not  until  May  31,  1906,  was  a  reduction  made 
to  four  per  cent.,  and  on  September  3oth  it  became  necessary 
to  restore  the  higher  rate,  and  on  June  30,  1907,  to  make  a 
further  advance  to  five  per  cent,  and  on  November  i5th,  to  six 
per  cent.  The  average  rate  for  1907  was  4.896  per  cent. 

The  Austro-Huagarian  Bank,  like  the  Bank  of  France, 
has  done  much  to  extend  accommodation  to  small  merchants. 
The  whole  number  of  pieces  of  paper  discounted  in  1878  was 
368,795,  which  grew  in  1882  to  550,829;  in  1887  to  704,608; 


Raffalovich,  Le  Marche  Financier  en  1905-06,  531. 


248 


HISTORY  OF  MODERN  BANKS  OF  ISSUE. 


in  1892  to  884,840;  in  1897  to  I>38°J4°5  J  and  in  1907  to 
2,944,077.  The  number  of  pieces  for  150  florins  ($60)  or  less 
was  374,238  in  1897.  The  number  for  300  crowns  ($60)  or 
less  in  1907  was  749, 506.' 

The  number  of  branches  of  the  Austro-Hungarian  Bank 
had  risen  in  1907  to  46  in  Austria  and  33  in  Hungary,  outside 
the  principal  establishments  at  Vienna  and  Buda-Pesth.  The 
bank  at  Buda-Pesth  has  been  rapidly  gaining  in  recent  years 
in  volume  of  business  over  the  bank  at  Vienna,  and  the  de- 
velopment of  Hungary  from  a  purely  agricultural  to  an 
industrial  country  has  created  a  jealousy  which  is  among  the 
causes  threatening  to  the  perpetuation  of  the  bank  in  its 
dual  form.  The  discounts  at  Buda-Pesth,  which  were  16,- 
853,181  florins  at  the  close  of  1875  against  discounts  at 
Vienna  of  51,109,319  florins,  advanced  at  the  close  of  1890 
to  35,688,570  florins  at  Buda-Pesth  against  53,253,903  florins 
at  Vienna,  and  at  the  close  of  1894  to  43,410,814  florins  at 
Buda-Pesth  against  41,649,846  florins  at  Vienna.  Still  more 
remarkable  has  been  the  competition  of  the  branches  outside 
the  two  capitals.  The  relations  in  percentages  of  the  volume 
of  discounts  outstanding  at  the  different  offices  on  three 
representative  dates  are  shown  in  the  following  table : 

Proportion  of  Discounts  at  Different  Offices. 


Percentage. 


Amount  Dec.  31, 1907 


Dec.  31, 1894.    Dec.  31, 1899.  Dec.  31, 1907.        (crowns) 


Vienna, 

23.11 

39-35 

15.44 

115,509,050 

Austrian  branches  , 

33-50 

22.49 

25.21 

188,563,759 

Buda-Pesth, 

24.08 

23.77 

25.74 

192,579,568 

Hungarian  branches, 

19-31 

14-39 

33.61 

251,415,719 

Total, 

100.00 

100  00 

100.00 

748,068,096 

An  enlarged  share  in  the  profits  of  the  bank  was  claimed 
by  the  state  in  the  extension  of  the  charter  in  1899,  as  in  the 

1  Cf.  articles  by  the  present  writer  in  New  York  Bankers1  Magazine, 
November,  1897,  LV.,  698,  and  April,  1899,  LVIII.,  528. 


THE  AUSTRO-HUNGARIAN  BANK.  249 

case  of  most  other  European  banks  in  recent  years.  Taxes 
are  levied  upon  the  real  estate  and  securities  belonging  to 
the  bank  and  on  the  dividends  paid  to  shareholders.  Under 
the  law  of  1878,  which  was  not  radically  changed  in  1887, 
five  per  cent,  of  net  profits  went  to  the  shareholders,  ten  per 
cent,  of  the  remainder  was  added  to  the  reserve,  the  divi- 
dend to  shareholders  was  then  made  up  to  seven  per  cent., 
and  half  the  remainder  went  into  the  treasuries  of  the  two 
monarchies,  in  the  proportion  of  seventy  per  cent,  to  Austria 
and  thirty  per  cent,  to  Hungary.1  This  distribution  was 
modified  in  1899  so  that  the  primary  dividend  to  share- 
holders is  only  four  per  cent.  After  the  allotment  of  ten  per 
cent,  of  the  remainder  to  reserve  and  a  small  amount  for 
pensions,  half  of  the  remainder  goes  to  the  state  and  half  to 
shareholders  until  their  total  dividend  reaches  six  per  cent., 
after  which  the  state  takes  two-thirds.8  Under  this  distri- 
bution net  profits  in  1907  were  29,925,536  crowns  ($6,075,- 
ooo),  of  which  the  shareholders  received  16,119,640  crowns 
($3.275,000)  or  at  the  rate  of  7.67  per  cent.,  while  the  state 
received  11,228,216  crowns,  exclusive  of  taxes.  Including 
1,886,460  crowns  paid  upon  excess  circulation,  the  total 
share  of  the  state  on  these  two  accounts  was  13,114,676 
crowns  ($2,662,000).  This  is  much  larger  than  any  previous 
allotment  to  the  state,  the  amounts  prior  to  1906  having 
been  less  than  5,000,000  crowns  annually.  The  rate  of  divi- 
dend in  1905  was  5.014  and  in  1906,  6.457  Per  cent.8 

The  creation  of  an  independent  bank  of  issue  for  Hungary 
was  one  of  the  projects  which  grew  logically  out  of  the 
movement  which  gained  momentum  at  the  beginning  of  the 
twentieth  century  for  the  restoration  of  Hungarian  indepen- 
dence. So  insistent  was  the  demand  for  a  separate  bank 
that  when  the  convention  for  the  continuance  of  the  union 
between  the  two  countries  was  prolonged  for  ten  years  in  the 


1  Noel,  I.,  466. 

2  fcconomiste  Europ6en,  March  6,  1908,  XXXIII.,  298. 

3  Moniteur  des  Inttrdts  Materiels,  January  15,  1908,  170. 


250         HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

spring  of  1908,  the  question  of  the  bank  was  left  to  a  special 
commission.  The  markets  were  disturbed  at  first  by  the 
fear  that  the  Hungarians  were  determined  upon  immediate 
separation,  but  confidence  was  restored  by  the  decision  of 
the  commission  of  twenty-one  appointed  by  the  Diet  to  take 
a  year  for  consideration.1  At  the  end  of  that  time  the  political 
demand  for  a  separate  institution  was  so  insistent  that  it 
caused  a  cabinet  crisis.2  The  question  remained  unsettled 
until  August,  1911,  seven  months  after  the  formal  expiration 
of  the  charter  of  the  bank.  A  law  was  then  enacted  (August 
8,  1911)  prolonging  the  bank's  legal  existence  until  the  termi- 
nation of  the  political  union  between  Austria  and  Hungary 
at  the  close  of  the  year  1917.  Legal  recognition  was  given 
by  the  new  statutes  to  the  portfolio  of  foreign  bills,  of  which 
60,000,000  crowns  ($12,180,000)  were  to  be  counted  as  a 
part  of  the  metallic  reserve,  and  discretion  was  vested  in  the 
ministers  of  finance  of  the  two  governments  as  to  the  maxi- 
mum amount  of  notes  to  be  issued  of  10  crowns  and  20  crowns. 
A  new  division  of  earnings  was  provided,  by  which  only 
one-fourth  of  the  amount  available  goes  to  the  shareholders 
and  three-fourths  to  the  state,  after  the  dividend  to  the  share- 
holders has  reached  seven  per  cent.3 

1  London  Economist,  April  4,  1908,  LXVL,  736.  The  questions  ad- 
dressed to  leading  economists  are  given  in  Economiste  Europe'en,  April 
10,  1908,  XXXIII.,  473. 

*  Economiste  Eurcpeen,  May  7,  1909,  XXXV.,  601. 

3  Raffalovich,  Le  MarcM  Financier  en  1911-12,  367. 


CHAPTER  X. 

THE   BANK    OF    RUSSIA. 

Its  Relation  to  the  Government  and  its  Modern  Development  —  The 
Long  Regime  of  Paper  Money  and  the  Efforts  in  1817,  1839,  1860, 
and  1881  to  Bring  it  to  an  End  —  The  Revision  of  the  Charter  in 
1894  —  Final  Success  of  Count  Witte  in  1897  —  The  Question  of 
the  Rate  of  Conversion  and  the  Gold  Standard  —  How  the  Bank 
Went  through  the  War  with  Japan  —  The  Bank  of  Finland. 


history  of  the  Bank  of  Russia  is  of  interest,  because 
it  is  the  most  successful  instance  on  a  large  scale  of  a 
bank  of  issue  owned  by  the  state  and  because  it  car- 
ried through  in  the  closing  decade  of  the  nineteenth  century 
the  most  serious  operations  ever  undertaken  in  Europe  for 
the  restoration  of  stability  of  exchange  upon  a  gold  basis. 
Russia  was  for  more  than  a  century,  with  only  brief  inter- 
ludes, under  the  regime  of  government  paper  money.  The 
task  of  restoring  sound  conditions  involved  the  solution  of 
many  monetary  problems  never  before  fully  solved,  and  the 
accumulation  of  one  of  the  three  greatest  stocks  of  gold  in 
the  world,  the  others  being  those  of  the  Bank  of  France  and 
the  Treasury  of  the  United  States.1  The  solution  of  these 
problems  fell  to  the  lot  of  a  succession  of  Ministers  of  Finance 
who  rose  to  the  level  of  their  opportunities  and  obligations, 
and  by  their  foresight  and  skill  placed  Russia  upon  the  high- 
road to  economic  competition  with  the  older  and  richer  nations. 
Paper  money  was  introduced  into  Russia  as  early  as  1768, 
and  was  welcomed  at  first  because  of  its  greater  convenience 

1  These  funds  stood,  respectively,  about  September  1,  1908  :  Bank  of 
Russia,  $541,300,000  ;  Bank  of  France,  $620,800,000  ;  United  States 
Treasury,  $1,021,000,000. 

251 


252          HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

than  the  copper  money  of  which  it  was  the  representative. 
The  pretext  was  maintained  for  a  time  that  the  paper  was 
simply  the  coined  certificate  for  the  copper,  and  the  notes, 
which  were  known  as  assignats,  were  at  a  slight  premium. 
Bureaus  were  established  at  St.  Petersburg,  Moscow,  and  in 
the  provinces  for  the  redemption  of  the  paper,  which  may  be 
considered  forerunners  of  the  Bank  of  Russia.  A  ukase  of 
January  10,  1774,  prescribed  that  the  limit  of  20,000,000 
roubles  ($15,400,000)  should  never  be  exceeded  in  the  issue 
of  paper  money.  This  pledge  was  disregarded,  as  most  such 
limits  upon  paper  issues  have  been,  and  after  the  limit  had 
been  raised  to  100,000,000  roubles  ($77,200,000)  on  June  26, 
1786,  in  order  to  obtain  resources  for  war  with  Turkey,  the 
depreciation  began.  The  price  of  the  silver  rouble  had 
risen  before  the  end  of  the  century  to  1.47  in  paper  roubles 
and  the  prices  of  merchandise  had  followed  the  upward 
course  of  the  precious  metals.  The  government  endeavored 
to  protect  itself,  at  the  same  time  that  it  recognized  the  de- 
preciation of  the  paper,  by  a  ukase  of  June  23,  1794,  raising 
the  capitation  tax  paid  by  the  peasants,  ' '  in  view  of  the  fact 
that  the  increased  price  of  all  products  permits  them  to  earn 
more  by  cultivation  and  other  work."  1 

The  four  most  serious  efforts  to  rescue  the  monetary  system 
of  the  country  from  the  mire  of  irredeemable  paper  were 
made  in  1817,  1839,  1860,  and  1881.  The  first  attempt  was 
made  by  means  of  loans  placed  both  abroad  and  at  home,  of 
which  a  part  of  the  proceeds  was  to  be  applied  to  the  retire- 
ment of  the  paper  circulation.  The  Emperor  Alexander 
I.,  after  the  peace  of  Tilsit  in  1810,  recognized  all  the  out- 
standing notes  as  a  public  debt,  pledged  the  public  faith 
to  their  redemption,  and  declared  that  no  more  paper  money 
should  be  issued.  The  circulation,  notwithstanding  these 
pledges,  climbed  upward  from  577,000,000  roubles  in  1810  to 
836,000,000  roubles  in  1817.  It  was  then  that  the  loans 

1  Paul  Leroy-Beaulieu's  La  Science  des  Finances,  II.,  656.  The  rou- 
ble was  the  exact  equixalent  of  four  francs  in  French  money  ($0.772) 
and  exchange  on  Paris  at  par  was  quoted  in  the  form  of  400  francs 
for  loo  roubles. 


THE  BANK  OF  RUSSIA.  253 

were  issued  which  had  been  promised  in  a  decree  of  May 
27,  1810,  and  the  progress  of  reform  was  so  rapid  that  the 
circulation  was  reduced  in  1822  to  595,776,000  roubles. 
Count  Cancrin  was  then  at  the  head  of  Russian  finances, 
and  he  steadily  refused  to  increase  the  paper  circulation  dur- 
ing thirteen  years,  in  spite  of  wars  in  Turkey,  Persia,  and 
Poland.  He  hesitated,  however,  at  the  policy  of  substi- 
tuting an  interest-bearing  debt  for  the  immense  mass  of 
paper  obligations  bearing  no  interest  and  did  not  succeed  in 
raising  the  value  of  the  paper  rouble  much  above  a  quarter 
of  the  rouble  of  silver.1 

The  government  made  the  second  effort  to  reduce  the  vol- 
ume of  paper  money  by  a  decree  of  July  i,  1839,  that  the 
paper  roubles  should  be  valued  at  three  and  a  half  to  a  rou- 
ble of  silver  and  that  a  new  form  of  paper  should  be  substi- 
tuted in  this  proportion.  The  new  paper  was  to  be  known 
as  bills  of  credit  and  was  to  be  redeemable  in  silver  and 
secured  by  the  public  domain.  The  exchange  of  the  assig- 
nats  for  the  new  bills  was  ordered  to  take  place  on  June  i , 
1843,  and  a  pledge  was  given  to  the  business  community  for 
the  credit  of  the  new  paper  by  depositing  in  the  citadel  of 
St.  Petersburg  in  December,  1844,  a  metallic  reserve  of  70,- 
464,245  roubles  ($54,000,000),  which  was  to  be  under  the 
control  of  twenty-four  members  of  the  stock  exchange.  This 
fund  was  increased  on  July  14,  1845,  by  12,180,000  roubles, 
which  established  a  coin  reserve  of  nearly  fifty  per  cent,  of 
the  170,000,000  roubles  in  bills  of  credit  then  outstanding. 
A  limited  redemption  was  maintained  and  the  bills  did  not 
drop  far  below  par  until  the  Crimean  War,  but  new  issues  of 
credit  paper  were  made  even  before  the  alliance  with  Austria 
to  crush  Hungary  and  735,000,000  roubles  in  the  new  bills 
were  in  circulation  at  the  close  of  the  Crimean  War  in  1857. 

The  third  attempt  to  extricate  the  Empire  from  the  evils 
of  a  debased  monetary  standard  was  connected  with  the 
establishment  of  the  Bank  of  Russia  in  substantially  the 


!  The  greatest  depression  in  the  value  of  the  assignats  was  in  1815, 
when  100  silver  roubles  exchanged  for  418  in  paper. — Lfcvy,  200. 


254          HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

form  in  which  it  existed  from  1860  to  1894.  The  statutes  of 
the  bank  were  established  by  a  decree  of  May  26,  1860,  and 
the  reserves  of  several  older  banking  establishments  were 
turned  into  its  coffers  and  it  assumed  their  engagements. 
The  original  capital  was  15,000,000  roubles  ($i 2, 000,000) 
and  the  declared  object  of  the  bank  was  to  consolidate  the 
credit  circulation  and  the  floating  debt  of  the  Empire.  The 
entire  ownership  and  management  were  in  the  government, 
but  the  capital  and  reserve  funds  wrere  declared  to  be  invio- 
lably set  aside  for  the  uses  of  the  bank,  and  the  private  de- 
positors were  guaranteed  against  confiscation.  A  third  of  the 
profits  were  to  go  to  a  reserve  fund,  part  of  which  was  to  be 
applied  from  time  to  time  to  the  increase  of  the  capital  stock.1 
The  capital  was  soon  increased  by  this  means  to  25,000,000 
roubles  and  the  reserve  fund  to  3,000,000  roubles,  where 
they  remained  until  the  reorganization  of  the  bank  in  1894. 
The  bank  had  a  metallic  reserve  on  May  i,  1861,  of  86,000,- 
ooo  roubles  against  a  circulation  of  714,627,069  roubles,  but 
the  commercial  discounts  scarcely  exceeded  14,000,000  rou- 
bles. The  depreciation  at  this  time  was  about  ten  per  cent, 
and  M.  Lamanski,  the  deputy  governor  of  the  bank,  pro- 
posed a  plan  for  restoring  parity  and  protecting  the  note 
issues.  He  recommended  the  transformation  of  the  bank 
into  a  stock  company,  with  the  monopoly  of  note  issue  for 
twenty-eight  years,  the  redemption  of  notes  in  coin  accord- 
ing to  a  sliding  scale  gradually  approaching  par,  and  author- 
ity to  sell  the  public  domains,  the  forests  and  the  state 
railways  to  protect  the  circulation.9 

The  plan  of  M.  Lamanski  was  adopted  in  a  measure,  the 
proceeds  of  a  loan  of  15,000,000  roubles  were  carried  to  the 
coin  reserve  of  the  bank  and  it  was  decreed  that  bills  re- 
ceived in  payment  for  the  loan  should  be  destroyed  and  that 
new  bills  should  be  issued  only  against  deposits  of  coin.  A 
scale  of  depreciation  was  fixed  which  involved  the  restora- 
tion of  parity  on  January  i,  1864.  Redemptions  proceeded 

1  Clement  Juglar,  Article  "  Banque  "  in  Dictionnaire  des  Finances, 

I.,  347; 

2  Winiarski,  57. 


THE  BANK  OF  RUSSIA.  2$  5 

for  a  while  without  great  losses  of  coin  to  the  bank,  and 
averaged  1,250,000  roubles  per  month  up  to  January  i,  1863. 
A  run  then  began  for  the  redemption  of  the  paper,  which 
resulted  in  a  net  loss  of  coin  during  January  of  2,287,000 
roubles;  February,  4,921,000  roubles;  March,  7,723,000 
roubles;  April,  10,213,000  roubles;  May,  10,367,000  rou- 
bles; June,  2, 233,000  roubles  ;  and  in  July,  6, 7 51,000  roubles. 
Various  devices  were  tried  to  stop  the  drain,  but  they  were 
unsuccessful  and  coin  redemption  was  suspended  by  a  ukase 
of  November  19,  1863.  Exchange  on  Paris,  which  had 
risen  on  October  29th  to  396  francs,  within  four  francs  of 
par,  fell  gradually  to  350  francs,  about  which  point  it  fluctu- 
ated for  some  time.  The  net  result  of  the  effort  to  restore 
specie  payments  was  a  reduction  of  the  outstanding  paper  to 
634,773,929  roubles  on  November  30,  1863,  and  a  useless 
expense  to  the  Treasury  of  nearly  100,000,000  roubles  ($75,- 
000,000). 

The  bank  was  entrusted  in  1862  with  the  mission  of  buy- 
ing lands  for  the  peasants  and  was  aided  by  the  deposit 
of  the  Treasury  funds  free  of  interest.  These  funds  were 
partly  employed  in  commercial  discounts,  which  were  so 
freely  granted  that  the  legitimate  necessities  of  commerce 
were  much  exceeded  and  a  mass  of  doubtful  paper  was  left 
in  the  hands  of  the  bank  in  the  crisis  of  1873.  The  expan- 
sion of  credits,  however,  was  chiefly  confined  to  St.  Peters- 
burg and  Moscow,  and  the  provinces  suffered  the  usual  evils 
of  a  country  endowed  with  a  single  great  bank, — the  lack 
of  capital,  of  currency,  and  of  facilities  for  credit.  The  ex- 
cess of  capital  at  the  centres  caused  reckless  speculation  and 
blind  investments  in  foreign  securities,  while  the  excessive 
issues  of  paper  money  gradually  found  an  outlet  only  after 
the  emancipation  of  the  serfs  created  a  greater  demand  for 
currency  for  wages.  One  of  the  difficulties  of  the  situation 
was  the  constantly  recurring  deficit  in  the  public  finances, 
which  called  for  new  issues  of  paper  money  to  fill  the  void. 
This  difficulty  was  overcome  for  a  moment  in  1870,  when 
the  deficit  declined  to  1,205,116  roubles,  and  during  the  next 
five  years,  which  showed  a  considerable  surplus.  The 


256          HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

quotation  of  the  rouble  on  the  exchange  market  was  330 
francs  in  1876,  or  seventeen  and  a  half  per  cent,  below  par, 
when  the  menace  of  war  with  Turkey  and  of  new  issues  of 
paper  money  carried  it  down  in  1877  as  low  as  234  francs,  or 
a  loss  of  more  than  41  per  cent.1 

The  new  paper  issues  which  were  feared  soon  became  a 
reality,  in  order  to  maintain  the  armies  in  the  field.  The 
circulation  had  risen  on  December  31,  1874,  to  797,313,500 
roubles  and  the  metallic  reserve  had  increased  to  231,227,000 
roubles.  The  circulation  was  reduced  during  the  next  two 
3^ears  until  it  stood  on  July  i,  1876,  at  693,000,000  roubles. 
The  issue  of  bills  of  credit  on  account  of  the  war  was  491,- 
000,000  roubles  and  the  net  circulation  on  December  18,  1878, 
was  1,103,280,185  roubles.  A  supplementary  issue  of  96,- 
000,000  roubles  in  1879,  with  the  famine  and  arrest  of  exports, 
caused  a  crisis  in  1880  which  reduced  the  revenues  of  the 
government  and  the  railway  receipts,  in  spite  of  high  paper 
prices,  and  caused  the  rapid  fall  of  the  coin  value  of  the 
rouble.  The  change  of  ministry  which  resulted  from  the 
crisis  brought  into  power  M.  Abasa,  who  at  once  announced 
a  plan  for  reimbursing  the  debt  of  the  government  to  the 
bank.  A  ukase  of  January  i,  1881,  ordered  that  the  Treas- 
ury pay  to  the  bank  without  delay  a  sum  sufficient  to  reduce 
to  400,000,000  roubles  the  debt  to  the  bank  on  account  of 
disbursements  for  the  government ;  that  the  remainder  of 
the  debt  (400,000,000  roubles)  be  funded  by  annual  payments 
of  50,000,000  roubles  by  the  Treasury  to  the  bank;  that 
bills  of  credit  be  destroyed  to  the  extent  of  their  accumula- 
tion in  the  hands  of  the  bank  and  with  due  regard  to  the 
needs  of  the  circulation.  The  first  part  of  this  programme 
had  hardly  been  carried  out  when  M.  Abasa  was  replaced  as 
Minister  of  Finance  by  M.  Bunge.  The  rigid  policy  of  re- 
form which  had  been  inaugurated  was  somewhat  relaxed  and 
the  bills  paid  into  the  bank  were  kept  on  hand  and  sub- 
sequently re-issued,  instead  of  destroyed.2  The  circulation 

1  Winiarski,  59-60. 

2  M.  Witte,  who  was  later  Minister  of  Finance,  has  been  subjected 
to  criticism  for  employing  92,700,000  roubles  ($71, 000,000)   paid  into 


THE  BANK  OF  RUSSIA. 

was  reduced  during  the  ten  years  from  1878  to  1888  from 
1,188,000,000  roubles  to  1,046,000,000  roubles,  but  the  value 
of  the  paper  rouble  did  not  advance  materially  towards  that 
of  gold. 

The  statutes  of  the  Bank  of  Russia  were  submitted  to  a 
complete  revision  in  1894  and  an  effort  was  made  to  make 
the  bank  of  greater  assistance  than  before  in  the  promotion 
of  industry  and  commerce.  The  first  article  of  the  new 
statutes,  promulgated  on  June  24,  1894,  declared  the  purpose 
of  the  bank  to  be  "  to  facilitate,  by  means  of  credit  for  short 
terms,  the  movement  of  commerce  and  to  promote  the  suc- 
cess of  national  industry  and  agricultural  production."  *  The 
new  statutes  define  with  considerable  precision  the  accom- 
modation extended  to  agriculture  and  industry  by  the  bank. 
The  institution  is  authorized  to  open  credits  and  make  loans 
against  bills  secured  by  pledges  of  hypothecation  and  by 
agricultural  or  industrial  material,  by  guarantee,  and  by 
other  sureties  which  the  Minister  of  Finance  may  recognize 
as  sufficient.  Loans  secured  on  material  are  to  be  made  only 
to  acquire  supplementary  material  or  renew  old  supplies,  but 
they  are  to  constitute  a  lien  upon  the  old  material  as  well  as 
the  new.  The  material  obtained  by  loans  from  the  bank  is 
required,  in  accordance  with  the  protective  policy  of  the 
Empire,  to  be  of  Russian  fabrication,  but  exceptions  may  be 
authorized  in  certain  cases  by  the  Minister  of  Finance  and, 
in  the  case  of  agricultural  material,  with  the  concurrence  of 
the  Minister  of  Agriculture.  The  maximum  loan  for  an 
industrial  enterprise  is  500,000  roubles  and  for  a  retail  mer- 

the  bank  for  cancellation,  in  the  construction  of  the  Trans-Sibe- 
rian Railway.— De  Cyon,  183-85.  M.  Raffalovich,  however,  credits 
the  government  with  having  known  how  "  not  to  abuse  the  issue  of 
paper  money,"  and  declares  that  "  when  the  needs  of  commerce  have 
required  a  greater  quantity  of  monetary  signs  an  issue  has  been  made 
temporarily  under  the  condition  of  a  special  guarantee." — Le  Marche 
Financier  en  1893-94.,  I4°- 

1  Bulletin  de  Statistique,  August,   1894,  XXXVI.,  183.     The  date 
here  given,  and  most  others  in  this  chapter,  are  according  to  the 
Julian  calendar,  whose  use  still  prevails  in  Russia,  and  are  twelve 
days  behind  the  Gregorian  dates. 
17 


258          HISTORY  OF  MOVERS  BAttKS  OF  ISSUZ. 

chant  600  roubles.  The  maximum  term  for  loans  for  mate- 
rial is  three  years,  but  periodical  payments  are  required 
when  the  term  exceeds  six  months.  The  bank  is  authorized 
to  accept  as  security  for  loans  to  small  farmers,  peasants,  and 
mechanics,  upon  the  pledge  of  their  products,  the  guarantee 
of  the  provincial  assemblies,  institutions  of  credit  (including 
mutual  societies  which  agree  to  operate  under  the  rules 
framed  by  the  bank),  and  individuals  chosen  from  among 
the  inhabitants  of  the  respective  communities  who  inspire 
confidence  at  the  bank. 

This  new  policy  of  the  bank  has  been  subjected  to  severe 
criticism  upon  the  ground  that  the  Russian  people  are 
unused  to  operations  of  credit  and  cannot  be  trusted  to  meet 
in  good  faith  the  required  payments.  The  Minister  of 
Finance  himself,  in  his  report  recommending  the  new  sys- 
tem, referred  to  the  collapses  of  most  of  the  banks  of  com- 
merce and  of  mutual  credit  which  have  taken  place  in 
Russia  during  the  past  twenty  years  and  to  the  failure  of 
two  branches  of  the  Bank  of  Russia  at  Kief  and  Kharkof, 
which  were  authorized  to  advance  money  to  small  farmers  on 
the  guarantee  of  two  large  proprietors  and  the  certificate  of 
the  local  tribunal  that  the  property  actually  existed  upon 
which  the  advance  was  made.  More  than  2,000,000  roubles 
were  advanced  annually  in  loans  of  this  sort,  but  great 
abuses  occurred  and  it  was  found  that  loans  were  obtained 
upon  products  which  had  no  existence  by  means  of  false 
certificates  given  by  the  authorities.1  The  government  has 
felt,  however,  that  some  losses  could  be  borne  in  teaching 
the  people  the  benefits  of  commerce  and  of  credit  and  did 
not  hesitate,  during  the  famine  of  1892  and  the  customs  war 
with  Germany  in  1893,  to  advance  to  the  suffering  peasants 
some  90,000,000  roubles  which  were  recovered  only  partially 
and  by  degrees. 

The  danger  of  loans  upon  products  is  increased,  in  the 
opinion  of  the  critics  of  the  bank,  by  the  permission  that 
the  products  on  which  loans  are  made  may  be  retained  in  the 


1  De  Cyon,  135-36. 


BANK:  of  xtrsstA.  259 

hands  of  the  producers  and  by  the  long  terms  for  which  the 
money  is  advanced.  I^ong-term  loans,  in  the  absence  of 
large  deposits,  can  only  be  made  by  fresh  issues  of  paper 
money  and  M.  Witte  made  declarations  in  his  report  as  to 
the  effect  of  such  issues  strangely  like  the  declarations  of 
Mirabeau  when  the  French  assignats  were  authorized  and  of 
Secretary  Chase  when  he  was  urging  upon  the  American 
Congress  the  substitution  of  legal  tender  government  paper 
for  bank-notes. '  ' '  The  value  of  these  bills, ' '  says  M.  Witte, 
"issued  exclusively  for  a  useful  object,  will  be  maintained 
by  the  productiveness  of  labor,  and  the  issue  of  such  bills 
will  not  influence  the  quotations  of  the  credit  rouble,  because 
in  making  these  issues  in  a  manner  responding  to  the  object 
in  view  the  quantity  of  securities  in  circulation  will  be  at  the 
same  time  increased." 

The  government  of  Russia,  however,  has  undertaken  a 
comprehensive  policy  for  the  development  of  the  resources 
and  productive  power  of  the  country.  It  has  been  felt  by 
those  who  shape  this  policy  that  the  government  should  take 
the  initiative  in  measures  which  in  other  countries  would  be 
left  to  private  enterprise.  This  course  has  been  adopted  by 
Russian  statesmen,  not  in  ignorance  of  the  laws  of  finance 
and  political  economy,  but  under  the  conviction  that  those 
laws  would  not  come  rapidly  into  operation  to  stimulate  com- 
mercial and  credit  operations  in  an  agricultural  country 
without  the  example  of  the  leadership  of  the  state.  This 
conviction  is  the  keynote  of  the  present  policy  of  the  Bank 
of  Russia.  The  government  is  willing  to  take  steps  in  mak- 
ing loans  to  producers  which  would  not  be  taken  by  a  private 
financial  establishment,  because  it  is  willing  to  risk  some- 
thing of  the  national  wealth  for  the  sake  of  increasing  it,  and 
because  the  strong  hand  of  the  government  can  be  appealed 
to  for  the  purpose  of  punishing  defaulting  debtors.  The 
issue  of  paper  money,  through  the  instrumentality  of  a  great 
bank,  is  felt  to  be  a  necessary  means  for  supplying  the  people 
with  that  ample  supply  of  monetary  signs  which  proved  so 


1  Vide  Ch.  xv.,  p.  399. 


HISTORY  OF  MODERN  BANKS  Of  ISSUE. 

beneficial  to  France  after  the  great  influx  of  gold  from  Cali- 
fornia and  Australia  and  which  has  proved  so  beneficial  to 
Scotland  under  her  system  of  free  banking.  The  government 
has  not  put  in  jeopardy  the  solvency  of  the  bank  by  its 
agricultural  loans,  for  the  entire  amount  on  December  16, 
1895,  was  27,466,804  credit  roubles,  and  had  been  materially 
reduced  in  1908. 

The  capital  of  the  Bank  of  Russia  was  fixed  by  the  new 
statutes  at  50,000,000  roubles  ($38,000,000),  and  the  limit  of 
the  special  reserve  was  increased  from  3,000,000  roubles  to 
5,000,000  roubles.  It  was  proposed  at  first  to  raise  the  new 
capital  by  setting  aside  annually  ten  per  cent,  of  the  profits, 
but  this  process  was  soon  regarded  as  too  slow  and  a  decree 
of  February  6,  1895,  provided  for  taking  the  necessary 
amount  from  the  surplus  in  the  Imperial  Treasury.1  Losses 
by  the  bank  are  met  from  the  reserves,  and,  in  case  of  their 
exhaustion,  are  to  be  carried  to  the  debit  account  of  the 
Treasury.  The  management  of  the  bank  is  entrusted  to  the 
Minister  of  Finance  and  the  annual  accounts  are  submitted 
to  the  Imperial  Council.8  The  number  of  branches  at  the 
close  of  1907  was  113. 

The  accounts  of  the  Bank  of  Russia  were  stated  in  a  similar 
manner  to  those  of  the  Bank  of  England,  in  the  separation 
of  the  issue  from  the  banking  department.  The  bills  of 
credit  are  government  notes  for  all  practical  purposes  and 
the  bank  itself,  even  in  its  banking  operations,  is  little  more 
than  a  bureau  of  the  Treasury.  A  circulation  of  769,342,91 1 
roubles  was  based  upon  government  obligations  and  corre- 
sponded to  the  "  authorized  circulation"  of  the  Bank  of 

1  Bulletin  Russe  de  Statistique,  April,  1895,  200. 

2  M.  Witte,  the  eminent  Finance  Minister,   also  created  a  board 
of  Treasury  officers  known  as  the  Council  of  the  Bank  and  corre- 
sponding,   according  to   his  view,  "  to  the  similar  councils  in   the 
central  banks  of  Western  Europe."     These  boards  take  the  place  of 
the  Council  of  Imperial  Institutions  of  Credit,  created  in  1817,  which 
contained  representatives  of  the  nobility  and  of  the  business  commu- 
nity, and  the  change  is  criticized  by  M.  de  Cyon  on  the  ground  that  it 
has  brought  the  bank  entirely  under  official   supervision   with   no 
external  check. — M.  Witte  et  les  Finances  Russes,  145. 


THE  BANK  OF  RUSSIA.  261 

England.  Circulation  beyond  this  sum  was  represented  by 
the  coin  reserve  of  the  bank  and  could  be  increased  only  by 
deposits  of  coin.  The  banking  department  was  utilized  for 
several  years  for  swelling  the  paper  issues  in  much  the  same 
manner  as  when  the  suspension  of  the  bank  act  is  authorized 
in  England.  These  special  issues  consisted  for  the  most 
part  of  the  notes  which  the  bank  was  ordered  to  call  in  and 
destroy  by  the  ukase  of  1881,  but  which  were  kept  in  reserve 
until  special  authority  was  given  for  their  re-issue  against 
new  deposits  of  securities  or  transfers  of  gold  to  the  cash 
reserves.1  The  government,  by  a  ukase  of  December  9, 
1894,  abolished  the  distinction  between  the  authorized  per- 
manent circulation  and  the  temporary  circulation  charged 
against  the  banking  department  by  transferring  the  tempo- 
rary issues  from  the  banking  department  to  the  issue  depart- 
ment. The  limit  of  authorized  circulation  without  metallic 
cover  was  increased  by  this  process  from  568,513,000  roubles 
to  769,342,911  roubles,  exclusive  of  about  285,000,000  roubles 
covered  by  gold.  Both  sides  of  the  account  of  the  banking 
department  were  diminished  by  the  amount  thus  transferred, 
— 200,829,455  roubles, — and  by  an  additional  sum  of  65,433,- 
691  roubles  transferred  in  gold  from  the  banking  to  the  issue 
department  as  the  gold  value  of  that  part  of  the  increased 
permanent  issue  not  represented  by  securities.3 

The  total  gold  funds  of  the  bank  and  the  Treasury  on 
January  i,  1895,  were  645,731,000  roubles  ($500,000,000). 
This  sum  was  not  all  in  actual  gold  held  in  Russia,  the  sum 
of  58,331,000  roubles  representing  foreign  credits  payable  in 
gold  on  demand  ;  but  the  Treasury  alone  had  a  gold  fund  of 
194,410,000  roubles  and  the  bank  held  39,540,000  roubles  in 
gold  in  its  banking  department,  exclusive  of  that  held 
against  outstanding  notes.8  The  funds  then  set  aside  to 


,  201-203. 

2  Bulletin  Russe  de  Statistique ',  Jan.-Feb.,  1895,  34-37. 

3  It  is  interesting  to  note  that  28,654,937  roubles  ($21,500,000)  of  these 
holdings  was  in  American  half-eagles,  the  largest  amount  of  foreign 
coin  held  of  a  single  kind  except  38,117,580  roubles  ($29,000,000)  in 
English  sovereigns. — Bulletin  Russe  de  Statistique,  March,  1895,  170. 


262          HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

cover  the  circulation  were  351,939,000  roubles  and  the  au- 
thorized circulation,  covered  and  uncovered,  was  1,121,282,- 
ooo  roubles  ($880,000,000).  The  government  by  a  ukase  of 
March  3,  1895,  increased  the  metallic  coverture  for  the  cir- 
culation by  transferring  from  the  Treasury  to  the  bank  98,- 
061,276  roubles  in  exchange  funds  and  substituting  1,125,682 
in  gold  for  an  equal  amount  of  silver  in  the  bank  reserves. 
This  made  the  total  gold  funds  held  against  circulation  375,- 
000,000  roubles,  exclusive  of  75,000,000  held  against  a  special 
issue,  and  made  the  metallic  coverture  more  than  a  third  of 
the  outstanding  bills. 

The  monetary  reform  in  Russia  which  was  practically 
achieved  by  the  autumn  of  1897  presents  one  of  the  most 
interesting  and  important  of  modern  financial  operations. 
Previous  failures  and  several  difficult  factors  in  the  problem 
imposed  upon  Count  Witte,  with  whose  name  the  reform  will 
be  permanently  linked,  a  policy  of  caution  and  complete 
preparation.  Three  of  the  important  questions  involved  were 
at  what  rate  the  value  of  the  paper  rouble  should  be  fixed, 
whether  the  metallic  standard  should  be  changed  from  silver 
to  gold,  and  where  the  resources  should  be  obtained  to  give 
stability  and  permanence  to  the  new  system. 

Upon  the  question  of  the  rate  of  conversion  of  the  paper, 
there  were  those  who  contended  that,  in  Russia,  as  in  the 
United  States  after  the  Civil  War,  the  old  metallic  unit  should 
be  restored  in  its  integrity.  Against  this  contention,  how- 
ever, were  arrayed  the  views  of  those  who  believed  in  con- 
secrating by  law  the  status  quo,  in  order  to  prevent  violent 
changes  in  prices  of  commodities  and  adverse  effects  upon 
the  export  trade  of  the  country.  While  there  had  been 
periods,  as  recently  as  up  to  the  war  with  Turkey  in  1877, 
when  the  credit  rouble  had  been  at  a  quotation  as  high  as 
3.40  francs  (par  being  4.00  francs),  the  quotation  had  fallen 
during  and  after  the  war  considerably  below  2.66  and  for 
a  time  in  1888  even  below  2.00  francs.1  These  years  had 


lyeroy-Beaulieu,  La  Science  des  Finances,  II.,  750. 


THE  BANK  OF  RUSSIA.  263 

represented,  however,  a  period  of  wide  fluctuations.  The 
salient  fact  upon  which  the  advocates  of  resumption  at  the 
current  value  of  the  rouble  rested  their  case  was  that  since  1891 
"  the  rouble  had  acquired  a  stability  more  and  more  marked 
and  a  fixity  of  value  which  was  a  benefit  both  to  the  country 
itself  and  to  those  who  were  called  upon  to  do  business  with 
it."  '  In  the  language  of  a  semi-official  publication3: 

In  fine,  the  credit  rouble  is  equal  to  a  fixed  quantity  of  fine  gold, 
almost  identical  with  the  amount  which  one  has  been  able,  on  the 
average  of  the  last  twenty  years  and  during  the  last  three  years,  to 
procure  with  this  same  rouble.  The  fixed  exchange  at  which  the 
Bank  of  Russia  buys  and  sells  gold  over  its  counter  causes  no  dis- 
turbance to  contracts,  old  or  recent,  formal  or  tacit ;  it  does  not 
modify  established  customs,  the  price  of  rents,  the  nominal  or  the 
real  amount  of  wages.  Mortgage  creditors  and  debtors,  holders  of 
the  public  funds  issued  in  credit  roubles,  functionaries  and  employees, 
and  all  others,  give  and  receive  paper  roubles  at  pars  and  these  roubles 
are  worth  to-day  that  which,  on  the  average,  they  were  worth  from 
1876  to  1895,  from  1879  to  1881,  from  1893  to  1896. 

Already,  as  early  as  1887,  Vichnegradsky,  the  great  finance 
minister  who  paved  the  way  for  the  later  successes  of  Count 
Witte,  had  declared  that  the  eventual  rate  of  conversion  for 
the  paper  rouble  would  be  two-thirds  of  its  nominal  value 
and  had  planned  to  strengthen  exchange  funds  and  end 
the  regime  of  irredeemable  paper.3  By  the  autumn  of  1892 
Count  Witte  was  preparing  to  bring  to  an  end  speculation 
in  the  paper  rouble  in  the  Berlin  market.  He  gave  notice  in 
January,  1893, to  banking  institutions  doing  business  in  Russia 
that  aid  lent  by  them  to  speculative  operations  in  the  rouble 
would  be  considered  as  incompatible  with  their  privileges. 
In  the  autumn  of  the  next  year,  when  the  comparative 
stability  of  the  paper  had  been  disturbed  temporarily  by 
unfavorable  reports  regarding  the  health  of  the  Russian 
Emperor,  Count  Witte  went  resolutely  into  the  market,  pur- 
chased the  "short"  contracts  offered  by  speculators  for  the 

1  RafFalovich,  Les  Methodes  pour  Revenir  &  la  Bonne  Monnaie,  20, 
9  Bulletin  Russe  de  Statistique,  March- April,  1896,  III.,  177. 
8Lorini,  1 1 8, 


264         HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

decline,  and  forced  them  to  settle  on  his  own  terms.1  With 
a  great  fund  of  gold  at  his  command,  it  became  possible  also 
to  adopt  the  means  of  regulating  paper  and  silver  currencies 
which  has  proved  so  effective  in  solvent  countries  in  recent 
years — the  sale  of  foreign  exchange.  As  early  as  the  autumn 
of  1892  the  Department  of  Finance  offered  to  buy  exchange 
on  Berlin  at  2.18  marks  and  to  sell  at  2.20,  shutting  fluctua- 
tions, while  this  policy  could  be  maintained,  within  the 
narrow  limits  of  normal  gold  points.8 

The  argument  for  fixing  the  new  gold  unit  at  the  current 
gold  value  of  the  paper  rouble  was  strengthened  by  the  fact  that 
the  metallic  standard  of  the  Empire  had  been,  not  gold,  but 
silver.  Neither  metal  was  in  circulation  when  Count  Witle 
projected  his  reforms,  but  with  his  usual  foresight  he  realized 
that  gold  was  the  proper  standard  for  a  modern  commercial 
state  surrounded  by  gold-standard  countries.  The  adoption 
of  gold,  however,  was  a  radical  departure  from  old  Russian 
legislation,  so  that  it  could  not  be  properly  contended  that 
the  government  was  under  a  legal  obligation  to  raise  the 
paper  rouble  to  a  parity  with  gold  at  its  old  ratio  to  silver. 
The  law  of  1842  had  decreed  that  "  the  principal  monetary 
unit,  legal  and  invariable,  of  all  the  moneys  having  cir- 
culation in  the  country  shall  continue  to  be  the  silver 
rouble."  3  It  was  in  September,  1876,  that  de  Reutern,  the 
Minister  of  Finance  of  the  day,  suspended  the  free  coinage 
of  silver,  and  on  the  loth  of  November  following  that  he 
required  customs  dues  to  be  paid  in  gold ;  but  the  definite 
adoption  of  the  gold  standard  awaited  the  completion  of  the 
monetary  reform  in  1897. 

That  the  gold  standard  could  be  established  and  main- 


1  Vide  the  author's  Principles  of  Money  and  Banking,  II.,  363-64. 

2  Lorini,  82. 

3  Lorini,  37.     This  writer  calculates  that,  at  the  price  of  silver  in 
1897,  redemption  of  a  credit  rouble  in  full  in  silver  would  have  given 
to  the  holder  1.97  francs  in  gold  value  instead  of  the  sum  of  2.67 
francs  actually  given  by  the  monetary  reform.— La  Reforme  Monetaire 
de  la  Russie,  in. 


THE  BANK  OF  RUSSIA.  26$ 

tained,  in  a  country  with  so  limited  an  economic  power  as 
Russia,  only  by  accumulating  large  gold  resources,  is  in- 
dicated by  the  facts  already  set  forth  regarding  the  gold 
funds  of  the  bank  and  the  Treasury.  Careful  consideration 
was  also  given  to  the  foreign-trade  movement,  the  produc- 
tion of  gold  in  Russia,  and  the  balance  of  payments  on 
account  of  financial  operations.  Substantially,  the  gold 
standard  was  established  by  means  of  borrowed  capital,  but 
so  skilfully  was  the  public  credit  built  up  that  by  the  con- 
version of  old  loans  at  lower  rates  the  use  of  a  thousand 
millions  of  dollars  was  obtained  from  French  and  other 
foreign  lenders  practically  without  increase  in  interest 
charges.1 

The  foundations  having  thus  been  laid  deep  and  broad, 
the  gold  standard  was  put  into  actual  operation  with  mar- 
vellous rapidity.  In  1895  an  ukase  of  May  8th  declared  that 
written  contracts  might  be  made  payable  in  Russian  gold 
roubles  and  that  such  contracts  might  be  settled  in  gold  or  in 
credit  roubles  of  equivalent  gold  value  at  the  rate  of  exchange 
prevailing  at  the  date  of  payment.  Public  depositaries  were 
authorized  to  receive  gold  at  its  exchange  value  in  the  pay- 
ment of  excises  under  regulations  framed  by  the  Minister  of 
Finance.  Other  steps  which  followed  during  the  summer 
authorized  the  bank  to  receive  deposits  of  gold  coin  and  bul- 
lion, foreign  bank-notes,  and  commercial  bills  payable  in 
gold  and  to  issue  certificates  therefor  payable  in  gold  on  de- 
mand. These  certificates  were  receivable  as  the  equivalent 
of  gold  at  the  Treasury  and  the  bank,  but  were  not  a  legal 
substitute  for  gold  between  individuals  except  with  the  con- 
sent of  the  creditor.  They  were  receivable  at  branches  of 
the  bank  for  gold  obligations  due  at  other  branches  and  ex- 
change was  furnished  free  except  for  the  cost  of  telegraphic 
service. 2  These  important  acts  were  followed  on  July  26, 

1  The  debt  increased  from  11,619,434,008  francs  on  Jan.  i,  1887,  to 
16,567,830,000  francs  on  Jan.  i,  1900. — Fotids  d'Etat  Rnsses  et  Autres 
•Valeurs  Mobilises  Cree  en  Rustie,  31,  64. 

2  Bulletin  Russe  de  Statistique,  July  -August,  1895,  II.,  26. 


266         HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

l895>  by  the  promulgation  of  rules  permitting  the  creation 
of  special  gold  accounts  at  the  bank,  for  the  reception  of  gold 
and  gold  certificates,  and  the  issue  of  check-books  represent- 
ing payments  exclusively  in  gold.  The  public  were  thus 
being  gradually  prepared,  by  the  flow  of  a  stream  of  gold 
through  the  Treasury  and  the  banks,  for  the  establishment 
of  gold  payments  and  the  maintenance  of  a  fixed  relation 
between  the  credit  rouble  and  the  metallic  standard. 

This  relation  was  definitely  established  in  1896  at  three 
roubles  of  the  new  standard  for  two  of  the  old,  or  at  the  ratio 
of  two-thirds  of  the  old  gold  rouble  of  four  francs  ($0.772) 
for  one  rouble  of  the  new  standard,  which  thus  had  a  value 
of  2.67  francs  ($0.515).  A  complete  project  for  a  new  coin- 
age system  upon  this  basis  was  submitted  by  Count  Witte  to 
the  Imperial  Council,  March  21,  1896,  and  was  the  basis  of 
the  ukase  of  August  8th,  which  provided  that  the  paper  rouble 
should  be  received  by  the  railways,  public  offices,  and  the 
bank  at  the  new  rate  until  January  i ,  1898.*  These  measures, 
positive  though  they  were,  were  looked  upon  in  certain 
quarters  as  only  a  provisional  fixing  of  the  rate  of  exchange, 
and  there  was  still  discussion  as  to  whether  the  rate  should 
be  given  permanence  by  the  issue  of  new  coins  and  by  the 
offer  to  redeem  paper  roubles  in  the  new  coins  at  the  bank. 

Count  Witte,  in  his  annual  estimates  for  1897,  reminded 
the  Kmperor  that  in  view  of  what  had  already  been  done, 
"legislative  sanction  will  add  nothing  to  the  dangers,  now 
much  exaggerated,  which  are  attributed  to  the  resumption 
of  payments  in  specie,  already  accomplished  in  fact."  On 
the  contrary,  he  declared,  so  far  as  demands  for  redemption 
depended  on  confidence  in  the  performance  of  the  reform,  the 
adoption  by  law  of  the  fundamental  principles  of  a  sound 
circulation  would  tend  only  to  diminish  the  risks  of  the  re- 
form, if  any  existed,  and  to  strengthen  to  a  higher  degree 
the  credit  of  Russia.8  These  resolute  views  bore  fruit  in  the 
ukase  of  January  3,  1897,  which  provided  for  the  issue  of 


1  Lorini,  100. 

2  Bulletin  Russc  de  Statistique ;  1896,  III.,  737. 


THE  BANK  OF  RUSSIA.  267 

the  old  gold  coins  of  the  Empire  at  their  former  weight  and 
fineness,  but  with  designations  making  the  old  imperial 
equal  to  fifteen  roubles  of  the  new  standard  instead  of  ten.  A 
coin  of  five  roubles  was  provided  for  by  an  ukase  of  November 
14,  1897,  but  it  was  not  until  December  n,  1898,  that  the 
gold  piece  of  ten  roubles  was  authorized,  which  soon  super- 
seded the  older  pieces  and  became  the  standard  gold  coin 
of  the  country.1  The  new  coinage  policy  was  codified  and 
confirmed  by  the  law  of  June  7,  1899,  which  declared, 
"  The  monetary  system  of  Russia  is  based  on  gold." 3 

On  the  part  of  the  bank,  provision  was  made  to  recognize 
by  law  its  obligation  to  redeem  its  notes  in  gold.  The 
statutes  were  modified  by  ukase  of  August  29,  1897,  so  that 
the  English  system  of  separating  the  issue  department  from 
commercial  operations  was  abandoned  and  the  accounts  fused 
into  a  general  balance-sheet.  The  authorized  "  uncovered" 
issue  was  reduced  to  600,000,000  roubles  ($309,000,000)  and 
of  this  amount  one-half  must  be  covered  by  gold ;  issues  in 
excess  could  be  made  only  for  gold.  It  was  declared,  more- 
over, that  issues  should  be  kept  within  limits  rigorously 
determined  by  the  actual  needs  of  the  money  market.3  Al- 
ready the  bank  held  more  gold  than  the  volume  of  notes 
outstanding,4  and  it  involved  no  risk  to  follow  the  suggestion 
of  Count  Witte  and  announce  readiness  to  pay  gold  on  de- 
mand. This  was  done  by  the  ukase  of  November  14,  1897, 


1  Bulletin  Russe  de  Statistique >  1901,  VIII.,  164.  The  text  of  some 
of  these  acts  is  given  in  English  by  Willis,  Sound  Currency,  July,  1899, 
VI.,  106-108 ;  in  French  by  I^orini,  La  Reforme  Monetaire  de  la  Russie, 
175-183. 

2  Le  Marche  Financier  en  1899-1900,  794. 

3  Bulletin  Russe  de  Statistique,  1897,  IV.,  467 

4  Beaufort  sets  forth  in  detail  how  special  deposits  of  gold  by  the 
Treasury  were  carried  to  the  general  assets  of  the  bank,  gold  holdings 
in  old  roubles  were  advanced  in  nominal  value  fifty  per  cent,  in  new 
roubles,  and  other  readjustments  brought  up  the  total  gold  resources 
of  the  bank  on  September  I,  1897,  to  1,131,700,000  roubles  against 
outstanding  notes  to  the  amount  of  1,068,778,000  roubles. — L'Acheve- 
ment  et  V Application  dela  Re 'forme  Monttaire  de  la  Russie,  32-35. 


268          HIS  TOR  Y  OF  MODERN  BANKS  OF  ISSUE. 

which  provided  for  inscriptions  on  the  notes  to  the  effect  that 
the  bank  would  redeem  them  in  gold  coin  without  limitation 
as  to  amount,  that  redemption  was  guaranteed  by  all  the 
resources  of  the  state,  and  that  the  notes  should  be  received 
at  par  throughout  the  Kmpire. 

These  measures  were  not  taken  without  misgivings,  both 
at  home  and  abroad,  as  to  the  possession  of  sufficient  economic 
power  by  Russia  to  retain  her  laboriously  accumulated  gold 
funds  in  the  face  of  adverse  conditions  of  trade  or  foreign  war. 
But  these  factors  had  been  anticipated  and  measured  by 
Count  Witte.  In  his  report  on  the  budget  of  1898,  he  dis- 
cussed the  conditions  necessary  to  the  success  of  the  reform 
and  did  not  fail  to  include  among  them  the  maintenance  of 
equilibrium  in  the  budget  and  good  faith  by  Russia  toward 
her  foreign  creditors.  Evidence  of  the  latter  had  been  given 
in  the  most  explicit  terms  by  an  order  of  the  Emperor,  issued 
in  connection  with  the  law  of  January  3,  1897,  which  de- 
clared that,  in  the  payment  of  engagements  previously  con- 
tracted in  gold  roubles,  the  coins  should  continue  to  rank 
only  at  their  old  face  value,  instead  of  at  the  new  value  one- 
half  higher.1  Proof  of  the  determination  to  separate  the 
affairs  of  the  bank  finally  and  absolutely  from  those  of  the 
public  Treasury  was  afforded,  on  the  morrow  of  the  crisis  of 
1899,  by  an  ukase  which  directed  that  the  last  50,000,000 
roubles  of  the  State  debt  to  the  bank  on  account  of  the  paper 
issues  be  cancelled  from  the  free  cash  balance  of  the  Treas- 
ury and  that  the  issue  of  bills  of  credit  should  never  again 
serve  as  an  auxiliary  resource  in  the  public  finances.2 

To  both  the  tests  of  financial  troubles  at  home  and  serious 
war  in  the  East,  the  Russian  monetary  system  was  subjected 
within  seven  years  after  it  was  fairly  put  in  operation  in 
1897,  and  both  tests  it  met  without  disaster.     The  scarcity  of 
capital  which  afflicted  Europe  in  1899  reacted  seriously  upon 


1  By  a  semi-official  interpretation  this  rule  was  extended  to  engage- 
ments contracted  in  "metallic  roubles." — Bulletin  Russe  de  Statis~ 
tique,  Nov. -Dec.,  1896,  III.,  740. 

8  Raffalovich,  Le  Marche  Financier  en  1899-1900,  810. 


THE  BANK  OF  RUSSIA.  269 

Russia  because  so  many  of  her  enterprises  were  fed  with 
capital  from  abroad.  As  usual  under  such  conditions,  the 
clamor  arose  for  ' ' more  money  ' '  and  for  a  freer  use  of  the 
facilities  of  the  Bank  of  Russia.  It  became  necessary  for 
Count  Witte  to  submit  a  memorial  to  the  Emperor,  showing 
that  the  quantity  of  currency  in  the  country  was  greater 
than  ever  before  and  that  if  the  bank  had  thought  it  advisable 
to  raise  its  discount  rate  it  was  only  taking  the  same  pre- 
caution as  other  state  banks  and  had  not  been  exempt  from 
this  necessity  even  under  the  regime  of  paper  money.1  The 
condition  of  the  bank  and  the  stability  of  the  gold  standard 
remained  absolutely  unshaken.  Discounts  and  advances 
were  increased  by  nearly  fifty  per  cent,  in  October,  1899,  a* 
the  height  of  the  crisis,  as  compared  with  the  previous  year. 
The  circulation  and  gold  reserves  declined  somewhat,  but 
this  was  the  result  of  the  policy  of  the  government  in  forcing 
gold  coin  into  actual  use.  From  October  i,  1897,  to  October 
J>  l899>  g°ld  in  circulation  had  risen  from  107,000,000  to 
662,300,000  roubles,  while  bank-notes  had  fallen  from  986,- 
600,000  to  555,000,000  roubles.  While  within  the  year  1899 
the  gold  resources  of  the  bank  fell  by  about  115,000,000 
roubles,  its  outstanding  note  obligations  fell  by  171,000,000 
roubles  and  its  gold  resources  remained  at  the  close  of  the 
year  at  730,000,000  roubles  ($375,950,000). 

A  more  serious  test  of  the  stability  of  the  monetary  system 
came  with  the  Russo-Japanese  War  in  1904.  Disaster  after 
disaster  came  to  Russian  arms  on  land  and  sea,  but  they 
never  threatened  the  solidity  of  the  structure  built  up  by 
Count  Witte  in  time  of  peace.  It  was  the  policy  of  the  Rus- 
sian Government  from  the  outset  to  suffer  no  infraction  of 
the  gold  resources  of  the  bank  and  to  support  the  expenses 
of  the  war  by  the  issue  of  interest-bearing  securities  rather 
than  by  resort  to  paper  money.2  The  close  of  the  year  1903 
found  the  bank  in  much  the  same  position  in  respect  to  re- 


1  Raffalovich,  Le  Marche  Financier  en  1899-1900,  442-448. 

2  Cf.  Cahen,  in  Questions  Monetaires  Contemporaines,  557. 


HISTORY  OF  MODERN  BANKS  of 

serves  and  circulation  as  at  the  close  of  1899.  The  total  gold 
resources  of  the  Treasury  and  of  the  bank  were  1,058,500,000 
roubles,  of  which  732,900,000  roubles  ($376,500,000)  was  in 
the  vaults  of  the  bank  and  169,100,000  roubles  ($87,000,000) 
in  foreign  bills,  making  the  gold  funds  of  the  bank  902,000,- 
ooo  roubles.  As  the  outstanding  circulation  was  then  only 
578,700,000  roubles,  the  notes  were  covered  in  the  ratio  of 
156  per  cent,  by  gold,  and  further  paper  issues  would  have 
been  well  within  the  limit  of  safety.1  The  Treasury,  more- 
over, instead  of  being  debtor  to  the  bank,  as  in  most  European 
states,  was  a  creditor  to  the  amount  of  a  free  balance  of 
635,000,000  roubles. 

If  there  was  any  doubt  of  the  purpose  of  the  Russian  Gov- 
ernment to  adhere  resolutely  to  a  sound  financial  policy,  it 
was  set  at  rest  by  an  official  communication,  appearing  in 
the  Official  Messenger  of  May  13,  1904,  which  declared  that 
"  However  seductive  it  might  appear  at  first  glance  to  make 
head  against  all  the  expenses  of  the  war  with  the  sole  re- 
sources afforded  by  the  normal  elasticity  of  the  circulation, 
the  Ministry  of  Finance  did  not  think  proper  to  employ  this 
method."  A  conference  of  the  Committee  of  Finance  defin- 
itely considered  the  proposal  to  suspend  specie  payments,  as 
the  Bank  of  France  had  done  in  1870,  in  order  to  husband  its 
gold,  but  decided  that  such  a  step  would  be  unnecessary  and 
harmful.2 

Commercial  credit  showed  some  signs  of  disturbance  at 
the  prospect  of  war,  and  the  fact  that  the  monetary  system 
had  not  yet  been  tested  led  to  purchases  of  foreign  bills  in 
order  to  transfer  capital  abroad.  Exchange  on  London  rose 
in  January,  1904,  to  ninety-five  roubles  (for  ;£io),  but  offer- 
ings of  bills  soon  exceeded  the  demand  and  the  rate  fell  in 
December  to  94.45  roubles.3  The  bank  co-operated  with  the 


1  Helfferich,  Les  Finances  des  Belligerants,  81. 

2  Le  Marche  Financier  en  1904-05,  926. 

3  Le  Marche  Financier  en  1904-05,  929.     The  latter  rate  is  close  to 
jhe  theoretical  par,  which  is  94.5758. 


TffE  8AXK  OF  RUSSIA. 

Treasury  to  prevent  exports  of  gold  from  Russia.  The  gov- 
ernment decided  to  place  loans  abroad  rather  than  at  home, 
in  order  to  pay  for  war  supplies  obtained  in  foreign  countries. 
The  balance  of  trade  thus  created  against  Russia  was  met  by 
drafts  upon  the  funds  arising  from  the  war  loans  in  London, 
Paris,  and  Berlin  and  by  the  free  sale  by  the  bank  of  drafts 
against  its  foreign  balances.  From  January  i  to  May  16, 
1904,  the  gold  balances  of  the  bank  abroad  fell  from  169,100,- 
ooo  roubles  to  39,900,000  roubles  ($20,540,000).' 

The  Bank  of  Russia  raised  its  discount  rate  early  in  1904 
from  four  and  a  half  to  five  and  a  half  per  cent.,  but  an- 
nounced that,  without  encouraging  speculation,  it  would 
extend  generous  accommodation  to  solvent  borrowers  and 
would  re-discount  freely  for  the  private  banks.  Its  own  dis- 
counts rose  from  431,900,000  roubles  on  November  23,1903, 
to  472,700,000  roubles  on  January  i,  1904  ;  but  this  increase 
was  not  much  more  than  usually  occurred  in  the  beginning 
of  the  year  and  was  offset  by  a  decline  to  400,600,000  roubles 
on  November  23,  1904.  The  discounts  of  the  private  and 
joint-stock  banks  increased  from  897,000,000  roubles  in 
August,  1903,  to  1,011,000,000  roubles  in  January,  1904,  but 
fell  back  in  August,  1904,  to  962,000,000  roubles. 

Some  additional  issues  of  notes  were  ultimately  made 
during  the  war,  but  they  were  chiefly  for  the  two  objects  of 
affording  a  convenient  medium  of  circulation  in  Manchuria 
and  of  drawing  gold  from  circulation  into  the  coffers  of  the 
bank.  The  total  increase  in  circulation  during  1904  was 
270,000,000  roubles,  but  this  was  largely  offset  by  an  increase 
of  181,000,000  roubles  in  the  gold  resources  of  the  bank  and 
an  estimated  decrease  of  103,700,000  roubles  in  gold  in  cir- 
culation. Conditions  in  Manchuria  were  peculiar,  in  that 
the  surrounding  countries  were  not  upon  a  gold  basis.  Sil- 
ver was  the  money  in  general  use,  but  passed  by  weight 
rather  than  by  the  nominal  value  of  the  coins.  The  Russian 
Government  found  it  advisable,  therefore,  to  accumulate  a 


1  Helfferich,  89. 


272        HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

bullion  fund,  in  which  rouble  notes  of  small  denominations 
were  redeemed,  and  to  issue  a  considerable  amount  of  such 
notes  while  large  military  forces  "were  maintained  in  Man- 
churia.1 In  Russia  itself  the  preference  for  paper  over  gold 
which  was  the  result  of  the  long  regime  of  paper  money  had 
not  been  outgrown  and  made  it  easy  for  the  bank  to  conform 
to  this  preference  without  impairing  confidence  in  the  stability 
of  the  monetary  standard.2 

The  crisis  of  1899  led  to  several  changes  in  the  charter  of 
the  State  bank,  designed  to  aid  the  private  banks.  The 
term  of  commercial  paper  which  might  be  accepted  by  the 
State  bank  for  re-discount  was  extended  from  three  to  eight 
months  and  the  privilege  of  re-discount  was  extended  to  the 
private  banks  on  loans  on  securities  which  were  not  accept- 
able directly  by  the  State  bank,  on  the  conditions  that  the 
rate  of  discount  should  be  ten  per  cent,  and  that  the  risk 
should  be  divided  between  the  two  institutions.3 

A  general  view  of  the  accounts  of  the  Bank  of  Russia  for 
representative  years  appears  in  the  table  below.  The  small 
amount  of  the  gold  resources  "of  the  bank  in  earlier  years  is 
explained  by  the  fact  that  much  of  the  gold  in  the  country 
was  held  by  the  Treasury,  until  the  plans  for  resuming  gold 
payments  were  put  in  operation  which  have  been  described. 
The  gold  includes  in  most  cases  deposits  by  the  bank  in 
foreign  countries.  The  decline  in  gold  resources  after  1898 
was  due  to  the  entry  of  gold  into  circulation  in  lieu  of  notes 
retired,  and  a  true  view  of  the  money  in  circulation  would 
include  this  gold.  The  deposits  as  reported  include  govern- 
ment deposits  of  all  types,  which  make  up  by  far  the  largest 
proportion  of  the  total.  Thus,  on  January  5,  1908,  Treasury- 
deposits  were  433,740,000  roubles.  There  are  several  strong 
commercial  banks,  which  do  much  of  the  discount  business 
under  ordinary  conditions. 


1  Le  Marche  Financier  en  1904-03,  932. 

2  Helfferich,  103. 

3  Le  Marche  Financier  en  1899-1900,  462. 


THE  BANK  OF  RUSSIA. 
Balance  Sheet  of  the  Bank  of  Russia. 


273 


JANUARY     I. 

CIRCULATION. 

GOLD   RESOURCES. 

LOANS  AND 
DISCOUNTS. 

DEPOSITS  AND 
CURRENT  ACCOUNTS. 

(In  millions  of  roubles.) 

l880 

II29.9 

I5I.O 

264.1 

249.2 

1885 

899.7 

170.3 

222.1 

357-4 

1890 

928.4 

210.3 

256.0 

375-6 

1892 

1054.8 

285.3 

214.4 

374-9 

I894 

I07I.9 

360.3 

2939 

441.2 

l895 

II2I.2 

350.8 

357-5 

557-4 

1896 

1055.2 

39L7 

404.7 

532.7 

1898 

901.2 

II80.7 

270.5 

644.7 

1900 

49I.I 

838.6 

388.2 

748.9 

1902 

542.1 

709.2 

513.5 

698.0 

1903 

553-8 

763.2 

478.9 

674.6 

1904 

604.1 

899.5 

472.7 

789.7 

I9°5 

856.0 

1024.2 

401.6 

626.4 

1906 

1204.6 

9*9.5 

665.5 

520.2 

1907 

1233.7 

1000.0 

520.3 

512.4 

1908 

II68.0 

950.7 

495-1 

596-2 

The  Bank  of  Finland. 

The  Bank  of  Finland  is  an  outgrowth  of  the  Diet  of  Borge 
in  1809,  which  regulated  the  relations  of  Finland  with 
Russia.  Swedish  notes  continued  to  circulate  for  a  long 
time  in  Finland,  in  spite  of  determined  efforts  to  supersede 
them  by  Russian  silver  and  paper. '  The  bank  was  not  con- 
spicuously successful  at  first,  but  was  able  in  1840  to  under- 
take the  redemption  of  its  notes  in  silver,  as  was  done  at  the 
same  time  by  the  Bank  of  Russia.  The  unusual  requirement 


i  Frederiksen,  185.  This  author  adds  :  "The  continuous  decrease 
in  the  value  of  Swedish  notes  consequent  upon  too  large  an  issue 
contributed  rather  to  spread  them  in  the  interior  of  Finland.  The 
merchants,  who  received  more  of  these  debased  notes  for  the  same 
quantity  of  merchandise,  made  large  profits  by  placing  the  notes  with 
their  customers,  who  only  understood  later  that  they  were  steadily 
decreasing  in  value.  As  is  always  the  case  when  money  is  decreasing 
in  value,  the  lower  classes  and  the  remoter  districts  of  the  country 
were  the  chief  sufferers." — Finland ;  Us  Public  and  Private  Economy ', 
186. 

18 


274          HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

that  it  should  also  redeem  Russian  notes  made  the  bank  a 
victim  of  the  vicissitudes  of  Russian  finance  and  was  the 
moving  cause  of  a  demand,  after  the  crisis  of  1857,  f°r  a 
separate  coinage  unit  in  Finland.  This  was  granted  by  the 
Russian  Emperor  by  a  decree  of  April  4,  1860.  The  new 
unit,  the  markka,  had  the  merit  of  being  at  once  the  equivalent 
of  the  French  franc  and  one-fourth  the  nominal  gold  value  of 
the  Russian  rouble.  The  depreciation  of  silver  after  1866 
caused  the  same  disorder  in  Finland  as  elsewhere  and  led  to 
the  adoption  by  decree  of  August  9,  1877,  °f  a  gold-standard 
law  and  the  suspension  of  free  coinage  of  silver. 

The  statutes  of  the  bank  were  reformed  in  1867  upon  the 
model  of  those  of  the  Royal  Bank  of  Sweden.  The  bank  is 
the  property  of  the  state  and  its  profits  go  into  the  Treasury. 
The  Estates  choose  four  delegates  and  four  auditors  and  ex- 
ercise by  other  means  control  over  the  general  policy  of  the 
bank.  The  capital  is  25,000,000  marks  ($4,825,000)  with  a 
reserve  of  31,739,855  marks.  The  limit  of  authorized  or  un- 
covered circulation  is  40,000,000  marks,  to  which  10,000,000 
marks  may  be  added,  by  consent  of  the  government,  to  meet 
emergencies.  For  any  excess  above  these  amounts,  the 
bank  must  hold  either  gold,  foreign  bills,  credits  with  corre- 
spondents abroad,  or  bonds  of  a  class  readily  marketable  on 
foreign  bourses.  Deposits  payable  on  demand  must  be 
covered  in  the  same  manner  as  notes,  and  the  amount  of 
actual  gold  must  not  be  less  than  20,000,000  marks.1 

Preparations  for  the  introduction  of  the  Russian  monetary 
system  into  Finland  were  indicated  by  a  decree  of  May  27, 
1904,  making  Russian  gold  full  legal  tender;  but  Finnish 
money  remained  for  the  time  being  legal  tender  alongside 
the  Russian  and  no  immediate  requirement  in  regard  to 
Russian  money  was  imposed  upon  the  bank.a  The  circula- 
tion of  the  bank  at  the  close  of  1907  was  95,026,745  marks 
($18,340,000)  and  its  assets,  which  reached  a  total  of 


1  Frederiksen,  196. 

9  Bulletin  de  Statistique,  September,  1904,  LVI.,  332. 


THE  BANK  OF  RUSSIA. 


2?$ 


201,153,187  marks,  included  25,392,732  marks  in  gold, 
54,655,880  marks  in  Finnish  commercial  paper,  29,134,794 
marks  in  advances  on  securities,  and  57,903,196  marks  on 
deposit  abroad.1 

i  fcconomiste  Europeen,  April  3,  1908,  XXXIII.,  445. 


CHAPTER  XI. 

THE  BANKS  OF  NORTHERN  EUROPE. 

Development  of  Banks  of  Issue  in  Belgium — The  Strain  Put  upon 
the  National  Bank  by  the  Franco-Prussian  War — Difficulties 
Caused  by  the  Double  Standard — The  Bank  of  Amsterdam  and 
Modern  Banking  in  Holland — Organization  of  the  Banks  of 
Sweden,  Norway,  and  Denmark. 

THE  history  of  banking  in  Belgium  is  a  history  of  greater 
freedom  from  state  interference  and  entanglement  with 
the  finances  of  the  government  than  that  of  most  other 
European  countries.  Belgium  began  her  present  national 
life  in  1830  with  the  assumption  of  but  a  small  debt  as  a 
legacy  from  her  relations  with  Holland  and  with  the  field 
comparatively  clear  for  the  adoption  of  a  sound  system  of 
currency  and  banking.  The  neutrality  of  Belgium  is  prac- 
tically guaranteed  by  the  great  powers  of  Europe  and  her 
military  expenditure  scarcely  exceeds  one  dollar  per  capita. 
The  National  Bank  of  Belgium  has  been  employed  by  the 
government,  therefore,  simply  as  its  financial  agent  in  its 
ordinary  transactions  and  has  not  been  diverted  from  its 
duties  to  industry  and  commerce  by  the  necessity  of  floating 
large  loans  or  covering  deficits  in  the  public  finances.  The 
government  under  these  conditions  has  been  able  to  keep  in 
its  own  hands  the  ultimate  power  over  the  bank,  without 
being  often  tempted  to  abuse  it,  and  reserved  in  the  first 
charter  the  right  to  grant  to  other  corporations  the  power  to 
issue  notes.  The  National  Bank  has  a  monopoly  of  note 
issue  in  fact,  but  is  restrained  in  some  measure  from  abuse 
of  its  power  by  the  knowledge  that  a  competitor  may  at  any 
moment  be  legally  authorized  to  enter  the  field. 

276 


THE  BANKS  OF  NORTHERN  EUROPE.  277 

Monopoly  of  note  issue  has  existed  in  Belgium  only  since 
1850.  The  oldest  institution  issuing  bank-notes  was  the 
General  Society  for  the  Promotion  of  National  Industry  (So- 
citte  G£n£rale  pour  favoriser  /'  Industrie  Nationale).  This  so- 
ciety was  founded  in  1822  principally  as  a  bank  of  circulation 
and  discounts,  but  it  became  little  by  little  a  great  institution 
of  finance  interested  in  promoting  investments. *  The  soci- 
ety was  a  depository  of  public  funds  and  of  large  private 
savings,  loaned  money  on  mortgages,  on  public  securities, 
and  on  merchandise  and  was  interested  as  promoter  and  fi- 
nancial agent  in  nearly  all  the  large  enterprises  of  the  coun- 
try. It  had  no  strong  rival  until  after  the  separation  of 
Belgium  and  Holland  and  it  invited  rivalry  then  by  its  own 
shortsightedness.  The  society  and  its  management  were 
largely  under  Dutch  influence  and  when  the  new  govern- 
ment of  Belgium  sought  the  assistance  of  the  bank  as  a 
public  depositary  the  managers  refused  to  make  any  arrange- 
ments which  would  subject  them  to  the  public  accounting 
officers.  They  regarded  the  services  of  the  bank  as  indis- 
pensable and  forced  the  government  to  countenance  the 
creation  of  a  new  banking  institution  more  friendly  in  its 
character. 

The  Bank  of  Belgium  was  founded  February  24,  1835,  and 
the  management  of  the  public  funds  was  taken  away  from 
the  old  institution  and  given  to  the  new.  The  methods  of 
the  new  bank  had  the  same  defects  as  those  of  the  old,  how- 
ever, in  attempting  to  make  long  time  loans  on  commercial 
paper,  while  issuing  circulating  notes  payable  on  demand. 
The  result  was  a  crisis  in  1838,  when  confidence  was  im- 
paired by  the  fear  of  war  over  the  provinces  of  I^imbourg 
and  ^Luxembourg.  There  was  a  violent  contraction  of  credit 
at  Brussels,  and  the  Bank  of  Belgium  found  itself  without 
cash  to  meet  its  obligations.  The  older  institution,  which 
was  somewhat  stronger,  and  was  not  regarded  as  so  largely 
a  creature  of  the  existing  government,  took  advantage  of 
the  opportunity  to  crush  its  rival  and  on  December  4,  1838, 


1  Courcelle-Seneuil,  339. 


2/8          HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

presented  1,000,000  francs  ($200,000)  to  the  Bank  of  Belgium 
for  redemption.  They  followed  this  up  on  December  loth, 
by  the  presentation  of  1,200,000  francs  and  on  December 
i5th,  by  the  presentation  of  300,000  francs  more.  The  bank 
was  forced  to  suspend  and  to  appeal  to  the  government  for 
assistance.  A  loan  of  4,000,000  francs  ($800,000)  was  voted, 
of  which  2,600,000  francs  were  applied  to  the  payment  of 
bills  and  commercial  obligations  of  the  bank,  and  1,400,000 
francs  to  meeting  the  demands  of  depositors  in  the  savings 
branches  which  had  been  established. ' 

The  manner  in  which  the  existing  institutions  mixed  up 
the  business  of  banks  of  issue  and  deposit  with  that  of  op- 
erations for  long  terms  created  a  strong  feeling  in  favor  of 
a  bank  devoted  exclusively  to  commercial  banking.  The 
Bank  of  Belgium  was  again  embarrassed  in  1842  and  was 
compelled  to  surrender  the  privilege  of  keeping  the  public 
monies.  An  arrangement  was  entered  into  between  the 
Treasury  and  the  SotietZ  Generate,  but  that  institution  felt 
the  effect  of  the  crisis  of  1842  and  was  compelled  to  abandon 
all  the  branches  which  it  had  established  except  that  at  Ant- 
werp. The  government,  therefore,  in  view  of  the  necessity 
for  an  institution  of  a  different  character,  in  granting  a  re- 
newal of  the  charter  of  the  Societe  Gtntrale  for  twenty-five 
years,  in  1843,  reserved  the  right  to  revise  and  restrict  its 
powers  before  the  end  of  the  year  1849.  The  crisis  follow- 
ing the  political  excitement  of  1848  compelled  both  existing 
banks  to  suspend  specie  payments  and  afforded  the  govern- 
ment the  best  of  excuses  for  curtailing  their  privileges.  The 
banks  were  aided  for  the  moment  by  an  act  of  March  20, 
1848,  giving  forced  legal  tender  character  to  their  bills  but 
confining  the  issues  within  fixed  limits.  The  year  1849  had 
hardly  begun,  however,  when  the  President  of  the  Council 
of  Ministers,  M.  Frere-Orban,  brought  forward  a  plan  for 
the  National  Bank  of  Belgium  (Banque  Nationale  de  Bel- 
gique).  The  charter  of  the  bank  was  granted  by  the  law  of 
May  5,  1850,  fixing  the  capital  at  25,000,000  francs  ($5,000,- 


Noel,  I.,  549- 


THE  BANKS  OF  NORTHERN  EUROPE.  2 79 

ooo),  divided  into  shares  of  1,000  francs  each,  and  giving 
the  bank  its  franchise  for  twenty-five  years.  The  bank  was 
forbidden  to  borrow  or  make  loans  upon  mortgages,  or  upon 
deposits  of  industrial  stock,  and  was  forbidden  to  take  part 
directly  or  indirectly  in  industrial  enterprises.  The  admin- 
istration of  the  bank  was  intrusted  to  a  governor  appointed 
by  the  King  for  five  years  and  six  directors  chosen  by  the 
shareholders,  and  a  government  commissioner  was  charged 
with  the  supervision  of  discounts  and  the  issuing  of  bills. 

The  National  Bank  found  itself  face  to  face  with  strong 
competitors  in  the  two  older  banking  institutions,  but  grad- 
ually gained  in  strength  and  credit  up  to  1870,  when  it  was 
subjected  to  one  of  the  severest  tests  ever  put  upon  a  banking 
institution.  It  was  not  distrust  of  the  bank,  but  the  politi- 
cal events  accompanying  the  Franco-Prussian  War  which 
caused  the  stress.  The  demand  for  banking  accommodation 
was  greatly  increased  by  the  necessity  of  furnishing  supplies 
for  the  hostile  armies  and  many  business  transactions  were 
transferred  to  Belgium  which  would  ordinarily  have  been 
carried  on  in  France  or  Germany.  This  was  an  evidence  of 
confidence  in  the  bank  which  would  not  have  been  without 
its  benefits  if  the  institution  had  been  prepared  for  so  sudden 
an  enlargement  of  its  transactions,  but  this  indication  of  con- 
fidence from  without  was  offset  by  a  degree  of  distrust  at 
home  which  led  to  the  presentation  of  large  quantities  of 
bank  bills  for  redemption  in  coin.  The  government  added 
to  the  dangers  of  the  situation  by  a  policy  which  tended  to 
embarrass  the  bank  and  to  increase  the  uneasiness  of  the 
public. 

The  administration  feared  that  a  declaration  of  war  be- 
tween France  and  Germany  would  lead  to  the  violation  of 
the  neutrality  of  Belgium,  and  directed  the  National  Bank 
to  take  measures  to  transfer  the  metallic  reserve,  represent- 
ing the  balance  due  the  Treasury,  to  the  port  of  Antwerp. 
The  bank  was  informed  on  July  i3th  that  this  transfer  must 
be  effected  without  delay.  An  attempt  was  made  to  carry 
out  the  movement  secretly,  but  the  news  became  public  that 
the  metallic  reserve  had  been  removed  from  Brussels  and 


280          HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

caused  great  popular  alarm.  The  government,  instead  of 
sustaining  the  bank,  issued  two  more  stupid  orders, — one  to 
the  agents  of  the  Finance  Department  in  the  provinces,  not 
to  permit  their  cash  to  be  exchanged  for  bank  bills,  and  the 
other  to  the  chiefs  of  the  military  forces,  to  exchange  bank 
bills  in  their  military  chests  for  coin.1  Notwithstanding 
this  apparently  deliberate  effort  to  discredit  the  bank,  the 
government  refused  to  permit  the  suspension  of  specie  pay- 
ments and  held  the  institution  strictly  to  the  performance  of 
the  obligations  of  its  charter.  The  orders  regarding  the 
public  funds  and  the  military  chests  were  so  palpably  un- 
wise that  they  were  quickly  revoked,  and  an  order  was 
given  to  pay  everything  in  bank  bills  which  could  be  so 
paid,  and  to  exchange  large  bills  at  the  agencies  of  the 
banks  for  small  ones,  in  order  to  facilitate  payments  in 
bills. 

The  discounts  of  the  bank  increased  from  177,500,000 
francs  on  July  10,  1870,  to  203,923,100  francs  on  July  2oth, 
and  to  223,231,744  francs  on  July  3ist.  While  assistance 
was  thus  rendered  to  commercial  credit,  the  presentation  of 
notes  for  redemption  rose  from  a  daily  average  of  600,000 
francs  ($120,000)  during  1869  to  a  daily  average  of  over 
i, ooo, ooo  francs  ($200,000)  during  the  eighty-two  days  from 
July  ist  to  September  20,  1870.  The  amount  presented  on 
July  20th  was  6,282,000  francs  ($1,250,000)  and  on  the  next 
day  7,025,000  francs  ($1,400,000),  and  the  daily  average  from 
July  I5th  to  July  3oth  was  2,094,000  francs  ($415,000). 
The  bank  was  able  to  meet  these  demands  by  appeals  for 
loans  of  coin  from  London,  Amsterdam,  Hamburg,  and 
Paris,  and  by  realizing  the  bills  drawn  on  foreign  countries 
which  it  had  in  its  possession.2  These  bills,  which  amounted 

1  Noel,  I.,  486. 

8  The  large  holding  of  foreign  bills,  chiefly  drawn  on  London,  in 
the  cash  reserves  of  European  banks  is,  "to  a  very  large  extent, 
solely  for  the  sake  of  the  interest  which  is  to  be  made  on  them. 
Bills  on  England,  owing  to  the  high  rate  of  interest  which  they  often 
bear,  as  compared  with  continental  rates,  are  a  favorite  investment 
abroad.  In  Paris,  Berlin,  Frankfort,  Hamburg,  and  other  cocti- 


THE  BANKS  OF  NORTHERN  EUROPE.  281 

at  the  outbreak  of  the  crisis  to  64,144,561  francs,  were  re- 
duced on  July  3ist  to  7,227,333  francs.  The  proceeds  were 
employed  in  the  purchase  of  bullion,  principally  in  silver, 
which  the  mint  rapidly  coined  into  crowns.  The  bank  was 
thus  enabled  to  meet  every  demand  and  to  reduce  the  rate 
of  discount  as  soon  as  the  crisis  was  over.  The  rate  of 
July  I5th  was  two  and  a  half  per  cent.,  but  this  was  in- 
creased to  five  per  cent,  between  July  i5th  and  August  5th, 
and  to  six  per  cent,  from  August  5th  to  August  27th,  and 
even  to  seven  per  cent,  for  bills  drawn  in  foreign  countries 
on  Belgium.  The  27th  of  August  saw  the  worst  of  the 
crisis  over,  and  the  domestic  rate  fell  to  five  and  a  half  per 
cent.  ;  on  September  2oth  to  four  and  a  half  per  cent.  ;  and 
on  October  8th  to  three  and  a  half  per  cent. 

Belgium  was  led  to  propose  the  formation  of  the  Latin 
Union  in  1865  because  of  the  difficulty  of  maintaining  the 
double  standard  under  the  oscillations  in  the  price  of  gold 
and  silver.  The  French  system  of  decimal  coinage  was 
adopted  by  the  law  of  June  5,  1832,  but  silver  was  made  the 
standard  and  no  provision  was  made  for  gold  coinage.  The 
creation  of  a  gold  circulation  in  France  after  the  great  gold 
discoveries  led  to  a  popular  demand  for  the  admission  of 
French  gold  coins  into  Belgium.  This  was  decreed  by  the 
law  of  June  4,  1861,  and  the  result  was  to  drive  the  silver 
five-franc  pieces  out  of  sight  and  change  the  standard  of 
actual  circulation  from  silver  to  gold.  The  National  Bank 
had  a  reserve  at  that  time  of  48,645,000  francs  in  silver  five- 
franc  pieces,  which  was  paid  out  to  meet  current  demands, 
but  this  fund  declined  by  November  8,  1862,  to  14,629,000 
francs,  and  the  bank  suspended  their  further  issue.1  The 
smaller  pieces  continued  to  disappear,  but  the  movement 
was  retarded  for  a  time  by  the  suspension  of  specie  pay- 

nental  cities,  the  bills  on  England  held  by  the  bankers  and  joint 
stock  companies  often  amount  to  many  millions  sterling  ;  and  a  very 
large  sum  remains  in  their  hands  for  several  months,— in  fact,  from 
the  time  when  the  bills  are  drawn  to  the  time  when  they  fall  due." — 
Goschen,  Foreign  Exchanges,  138. 
1  Shaw,  191. 


282          HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

ments  in  the  United  States.  The  drain  set  in  again  in  1865, 
the  small  silver  pieces  became  so  scarce  that  they  could  not 
be  supplied  by  the  bank  in  sufficient  sums  to  meet  the 
demands  of  manufacturers,  and  the  government  was  com- 
pelled to  resort  to  the  coinage  of  nickel  pieces.  The  Bel> 
gian  delegates  urged  the  adoption  of  the  gold  standard  ai 
the  conference  which  resulted  in  the  formation  of  the  Latin 
Union,  but  consented  to  the  convention  finally  adopted  by 
the  other  powers. 

The  fall  in  the  value  of  silver  after  1867  dragged  Belgium 
into  new  difficulties,  against  which  the  convention  of  the 
Latin  Union  afforded  her  no  protection.  The  government 
was  authorized  by  the  law  of  December  18,  1873,  to  suspend 
the  minting  of  silver  five-franc  pieces,  which  had  been  going 
on  at  the  rate  of  300,000  francs  a  day.  The  coinage  of  sil- 
ver had  already  exceeded  domestic  needs,  and  great  quanti- 
ties drifted  across  the  French  frontier  and  found  their  way 
into  the  Bank  of  France.  This  circumstance  was  made 
the  occasion  of  a  demand  at  the  conference  of  1885  that  the 
countries  of  the  Union  take  back  their  national  coins  and 
pay  for  them  in  gold.  The  Belgian  delegate,  M.  Pirmez, 
at  first  refused  to  consider  any  such  proposition,  declared 
that  Belgium  was  being  made  the  victim  of  the  misfortunes 
of  the  Union,  and  absented  himself  from  the  sittings  of  the 
conference.  He  declared  that  the  treaty  of  1865  made  no 
reference  to  any  such  process  of  liquidation  ;  that  the  ac- 
ceptance of  Belgian  coins  by  French  citizens  had  not  been 
a  part  of  the  treaty,  but  a  result  of  voluntary  action  ;  and 
that  the  dissolution  of  the  treaty  would  simply  relieve 
public  depositaries  from  further  acceptance  of  foreign  coins, 
without  imposing  any  obligations  upon  their  issuers  to  re- 
deem them.1  The  fear  that  the  collapse  of  the  Latin  Union 
would  imperil  the  gold  standard  in  Belgium  finally  pre- 
vailed, however,  over  other  arguments,  and  Belgium  con- 
sented to  a  basis  of  liquidation  by  which  each  country  was 
to  pay  in  gold  for  one-half  of  its  five-franc  pieces  returned 


Ansiaux,  14. 


THE  BANKS  OF  NORTHERN  EUROPE.  283 

to  it  and  was  allowed  to  leave  the  other  half  to  be  returned 
by  the  play  of  foreign  exchange.1 

The  position  of  Belgium  and  of  the  National  Bank  will 
be  peculiarly  embarrassing  if  the  dissolution  of  the  L,atin 
Union  destroys  the  legal  status  of  the  silver  coins  of  one 
country  in  the  others.  Belgian  coins  would  under  such 
circumstances  flow  rapidly  back  into  Belgium  and  would  be 
likely  to  glut  the  reserves  of  the  bank  and  make  difficult 
the  maintenance  of  the  gold  standard.  The  metallic  reserve 
of  the  bank  averages  about  100,000,000  francs,  of  which 
only  a  fourth  is  now  in  silver,  but  the  volume  of  Belgian 
five-franc  pieces  outstanding  is  estimated  at  400,000,000 
francs,  of  which  about  200,000,000  are  in  the  Bank  of 
France,  besides  those  in  active  circulation  in  France.2  A 
glut  of  silver  in  Belgium  would  have  the  tendency  to  draw 
gold  from  the  National  Bank,  while  there  would  be  the 
strongest  disposition  in  the  bank  to  retain  gold  and  force 
silver  into  circulation.  It  would  put  a  severe  test  upon  the 
credit  of  the  bank  and  its  800,000,000  francs  of  paper  circu- 
lation to  attempt  to  enforce  the  policy  of  the  Bank  of  France, 
to  redeem  in  silver  at  discretion,  and  the  pressure  for  gold 
for  export  would  be  strong  because  of  the  redundancy  of 
the  monetary  circulation  which  the  glut  of  silver  would 
cause.  The  heroic  policy  of  buying  gold  and  selling  silver 
for  what  it  will  bring  in  the  bullion  market  is  favored  by 
some  Belgian  statesmen  and  may  prove  the  only  effective 
means  of  maintaining  the  gold  standard. 

The  renewal  of  the  charter  of  the  National  Bank  which 
was  enacted  in  1872  extended  the  life  of  the  institution  to 


1  M.  Haupt  considers  France  rather  than  Belgium  the  victim  in 
this  transaction  and  regrets  that  her  delegates,  after  securing  the 
consent  of  the  delegates  of  Italy,  Switzerland,  and  Greece  to  liquida- 
tion in  full  in  gold,  yielded  to  their  demand  that  they  have  the  same 
privilege  as  Belgium  of  liquidating  in  gold  to  the  extent  of  only  one- 
half  their  silver  coins  accumulating  in  French  hands. — The  Monetary 
Question  in  1892,  go. 
2  Haupt,  93. 


284         HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

January  i,  1903,  and  the  capital  was  increased  to  50,000,000 
francs  ($10,000,000).  Several  changes  were  made  in  the 
previous  laws  regarding  taxation,  the  handling  of  the  public 
funds,  and  the  share  of  the  government  in  the  profits  of  the 
bank.  Greater  precision  was  introduced  into  the  provi- 
sions regarding  the  proportion  of  specie  held,  which  is  now 
required  to  be  one-third  of  the  notes  in  circulation  and  of 
other  demand  liabilities.  This  reserve  may  be  trenched 
upon  in  emergencies  with  the  consent  of  the  Minister  of 
Finance.  The  notes  of  the  bank  were  made  a  legal  tender 
by  the  law  of  June  20,  1873,  but  only  so  long  as  they  are 
redeemed  in  coin  on  demand  and  are  receivable  in  public 
depositaries.  Their  acceptance  by  public  depositaries  is 
defined  by  law,  but  may  be  suspended  by  the  Minister  of 
Finance.  A  portion  of  the  public  funds  in  the  custody  of 
the  bank  is  allowed  to  be  loaned,  but  the  profits  earned  go 
to  the  credit  of  the  Treasury. 

In  the  revision  of  the  charter  in  1900  the  tendencies  toward 
State  socialism  which  had  become  strong  in  Belgium  had  free 
play.  The  privileges  of  the  bank  were  indeed  extended  to 
January  I,  1929,  but  only  under  provisions  which  turned 
over  a  large  part  of  its  profits  to  the  public  Treasury.  Under 
the  extension  of  the  charter  in  1872  the  bank  was  required 
to  pay  a  patent  tax  on  the  gross  volume  of  business,  a  stamp 
tax  on  its  notes,  and  a  tax  of  one-quarter  of  one  per  cent, 
semi-annually  on  the  excess  of  the  circulation  above  275,- 
000,000  francs.  These  provisions  were  continued  by  the  law 
of  March  26,  1900.  The  other  principal  taxes  levied  by  the 
law  of  1872  were  one-quarter  of  the  net  profits  of  the  bank 
above  six  per  cent,  and  on  discounts  the  entire  excess  of  re- 
ceipts above  a  rate  of  five  per  cent.1  These  two  limits  were 
radically  changed  in  1900.  Henceforth  one-quarter  of  the 
profits  was  to  go  to  the  State  after  four  per  cent,  had  been 
distributed  to  the  shareholders  and  all  profits  obtained  from 
a  discount  rate  above  three  and  a  half  per  cent,  were  to  find 
their  way  into  the  public  Treasury.2  Under  these  provisions 


1  Noel,  L,  563- 

1  Bulletin  de  Statistique ,  April,  1900,  XL, VII.,  422. 


THE  BANKS  OF  NORTHERN  EUROPE.  285 

the  payments  to  the  State  in  1907  reached  12,721,111 
francs  ($2,455,0x30)  which  was  more  than  twice  the  cost 
of  administration  (4,887,954  francs)  and  exceeded  by 
about  fifty  per  cent,  the  8,300,000  francs  distributed  to 
shareholders.1 

The  collections  from  the  excess  of  discount  rates  above 
three  and  a  half  per  cent,  were  7,002,541  francs  ($1,350,000) 
in  1907  and  were  probably  larger  than  was  anticipated  when 
the  law  of  1900  was  enacted.  Discount  rates  had  then  been 
low  for  many  years  throughout  Europe.  For  the  entire 
period  from  1851  to  the  close  of  1900  the  rate  was  at  three 
per  cent,  or  less  during  10,623  days  out  of  18,262,  and  was 
only  once  (in  1873)  as  high  as  seven  per  cent.3  But  the 
scarcity  of  capital  throughout  the  world  during  the  opening 
decade  of  the  twentieth  century  did  not  leave  Belgium  un- 
touched. The  rate  of  discount  at  Brussels  was  lower  than 
elsewhere,  except  at  Paris,  and  in  1904  was  maintained  uni- 
formly at  three  per  cent.  ;  but  was  raised  on  October  30,  1905, 
to  four  per  cent.,  and  in  1906  was  subjected  to  four  changes. 
Even  under  this  pressure  the  average  rate  for  1905  was  only 
3.18  per  cent,  and  for  1906  3.84  per  cent.,  the  amount  col- 
lected from  the  tax  on  the  excess  discount  rate  in  the  former 
year  being  only  471,269  francs.  It  became  necessary,  how- 
ever, under  the  troublous  conditions  of  1907,  to  advance  the 
rate  on  March  i8th  to  five  per  cent.  ;  on  November  2d  to  five 
and  a  half  per  cent.  ;  and  six  days  later  to  six  per  cent., 
carrying  the  average  rate  for  1907  to  4.95  per  cent.  Re- 
ductions of  the  rate  were  made  early  in  1908,  until  at  the 
close  of  March  it  was  at  three  and  a  half  per  cent. 

As  was  pointed  out  by  the  censors,  in  their  annual  report 
for  1907,  these  high  rates  were  necessary  for  the  protection 
of  the  cash  resources  of  the  bank  and  could  not  be  attributed 
in  any  way  to  selfish  interest  on  the  part  of  the  directors, 
because  of  the  provision  attributing  absolutely  to  the  public 
Treasury  the  proceeds  of  discount  above  three  and  a  half  per 


1  Assemblee  Generate  des  Actionnaires  du  24.  Fevrier^  1908. 
9  Palgrave,  185. 


286         HISTORY  OF  MODERN  BANKS  OF  ISSUE. 


cent. '  The  advantage  of  a  higher  rate  than  prevailed  at  Paris 
in  the  autumn  of  1907  was  to  bring  exchange  nearly  to  par  and 
to  check  the  outward  movement  of  gold,  which  has  repeatedly 
compelled  the  bank  to  strengthen  its  reserves  by  special  meas- 
ures and  at  heavy  cost.  It  has  been  largely  by  its  holdings 
of  foreign  bills  that  it  has  been  able  to  carry  on  its  operations 
and  maintain  an  adequate  stock  of  gold.* 

The  leading  items  of  the  accounts  of  the  bank,  for  repre- 
sentative years  since  its  foundation,  are  shown,  in  francs, 
in  the  following  table '  : 

Principal  Accounts  of  the  Bank  of  Belgium. 


DEC.SISt. 

CIRCULATION. 

METALLIC  RE- 
SERVE. 

DISCOUNTS. 

DEPOSITS. 

(In  francs  =  $0.193.) 

1851 

50,346,210 

29,264,880 

44,034,953 

25,980,830 

1860 

117,899,960 

63.023,535 

155,958,745 

81,825,144 

1870 

202,528,520 

95,614,523 

196,233,878 

8l,3I9,92I 

1880 

339,969,510 

98,787,206 

283,992,826 

72,142,896 

1890 

404,721,600 

103,413,340 

3I2,67O,66l 

67,723,926 

1892 

427,594,580 

114,654,737 

309,391,705 

69,340,318 

1894 

469,662,000 

130,756,515 

346,590,227 

78,558,169 

1895 

476,502,020 

IOI,O6l,5O7 

365,263,291 

72,103,788 

1896 

492,636,910 

101,978,446 

399,683,424 

90,649,788 

1898 

544,652,040 

117,087,292 

424,795,032 

98,975,211 

1900 

631,631,800 

108,757,109 

465,244,299 

81,754,197 

1902 

676,140,330 

114,170,310 

513,750,490 

78,854,638 

1903 

671,006,560 

117,117,388 

533,069,957 

86,971,009 

1904 

694,429,290 

H9,366,357 

557,740,290 

93,374,199 

1905 

724,082,140 

117,621,107 

570,024,215 

98,615,552 

1906 

770,423,340 

124,185,128 

597,370,467 

84,000,000 

1907 

798,167,160 

133,26l,8OO 

678,641,352 

87,573,812 

igoS4 

761,513,400 

154,803,550 

615,770,545 

82,401,579 

1  Assembles  Generate,  1908. 

2  Palgrave  declared  in  1903  that  "Through  holding  these  drafts  on 
other  countries  the  council  of  the  bank  has  the  means  of  operating  in 
any  direction  when  the  exchanges  are  unfavorable  to  Belgium.  .  .  . 
Roughly  speaking,  one-fifth  part  of  the  bills  it  has  dealt  with  during 
the  last  twenty  years  have  been  on  foreign  countries." — Bank  Rate 
and  the  Money  Market ',  185. 

3  Annuaire  Statistique  de  la  Belgique,  1906,  378. 

4  October  ist. 


THE  BANKS  OF  NORTHERN  EUROPE.  28/ 

The  Bank  of  The  Netherlands. 

The  existing  Bank  of  the  Netherlands  is  the  successor  of  the 
Bank  of  Amsterdam,  one  of  the  most  famous  of  the  banks  of 
the  Middle  Ages.  The  Bank  of  Amsterdam  was  not  a  bank  of 
issue  in  the  modern  sense,  but  proposed  originally  to  deliver 
receipts  for  deposits  of  coin.  The  bank  was  founded  by  an 
ordinance  of  the  City  of  Amsterdam  of  January  31,  1609, 
and  was  called  the  Exchange  Bank  (Amsterdamsche  Wissel- 
banfc).  Much  confusion  and  many  disputes  had  arisen  in 
the  city  because  of  the  variety  of  coins  in  circulation  and 
their  departure  from  the  proper  standard.  Money  of  full 
weight  rose  to  a  premium  with  the  exchange  brokers  and 
the  fact  was  considered  as  the  result  rather  than  the  cause 
of  their  operations.  The  city  undertook  by  a  statute  of  July 
15,  1608,  to  prohibit  the  holding  of  deposits  or  the  transfer 
of  money  by  any  one  except  the  owners  or  their  personal 
agents.  The  use  of  bills  of  exchange  was  forbidden  and 
traders  were  directed  to  make  no  discrimination  between 
light  and  heavy  coins  nor  to  give  or  take  money  at  a  higher 
rate  than  that  fixed  by  the  States-General. 

These  provisions  were  only  intended  to  clear  the  ground 
for  the  establishment  of  the  new  bank  under  government 
control.  All  bills  of  exchange  were  required  to  be  paid 
through  the  bank,  and  the  institution  was  required  to  sell 
any  kind  of  specie  demanded  of  it  at  as  low  a  premium  as 
possible.  The  transferable  deposits  or  credits  came  to  be 
known  as  '  *  bank  money  "  and  bore  this  designation  through- 
out the  history  of  the  bank.  The  creation  of  a  means  of 
exchange  of  fixed  and  uniform  value  did  much  to  promote 
the  great  commerce  of  which  Amsterdam  was  becoming  the 
centre.  The  bank  accepted  deposits  only  at  their  bullion 
value  and  granted  credit  for  the  amount  in  lawful  money, 
subject  to  a  proper  charge  for  handling.  Deposits  were 
necessarily  subject  to  charges,  because  the  bank  was  sup- 
posed to  keep  in  its  vaults  every  guilder  received  and  to  do 
no  loan  and  discount  business.  Payments  in  Amsterdam 
came  to  be  made  universally  in  bank  money,  by  the  pre- 


288          HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

sentation  of  a  transfer  order  at  the  bank  by  the  payer  or  his 
authorized  agent,  which  entitled  the  payee  to  the  credit  on 
the  next  day.  The  bank  became  so  general  a  medium  of 
payments  in  Amsterdam  that  the  most  extravagant  estimates 
were  formed  of  the  gold  and  silver  stored  in  its  vaults. 
Some  put  the  amount  as  high  as  900,000,000  gulden  ($360,- 
000,000)  but  the  more  modest  and  accurate  estimate  of 
Adam  Smith  was  33,000,000  gulden  ($i3,5oo,ooo).1 

Direct  redemption  of  bank  credits  in  coin  gradually  fell 
into  disuse,  partly  because  bank  money  was  so  much  pref- 
erable to  coin  for  nearly  all  practical  purposes  and  partly  be- 
cause of  the  acceptance  of  foreign  coins  on  special  deposits. 
The  system  of  advances  upon  such  deposits  was  formally 
put  in  operation  in  January,  1683,  and  the  bank  issued  a  re- 
ceipt to  the  depositor  for  the  bullion  value  of  the  deposit, 
certifying  his  right  to  withdraw  it  upon  returning  the  bank 
money  with  which  he  had  been  credited  and  paying  one- 
eighth  of  one  per  cent,  interest.  The  right  of  withdrawal 
was  forfeited  if  the  charges  were  not  paid  and  the  deposit 
renewed  within  six  months.  It  was  necessary,  therefore,  in 
order  to  withdraw  coin  thus  deposited,  to  have  both  the  re- 
ceipt and  the  equivalent  amount  of  bank  money.  The  bank 
money  outstanding  was  in  excess  of  the  legal  coin  in  the 
custody  of  the  bank,  but  not  in  excess  of  the  domestic  and 
foreign  coin  and  bullion.  The  lapsing  of  receipts  protected 
the  bank,  therefore,  from  demands  for  coin  redemption  which 
it  could  not  meet,  while  another  method  was  adopted  to  pre- 
vent the  excess  of  the  bank  money  in  circulation  and  to  pro- 
vide bullion  for  those  who  desired  it  for  export. 

The  method  adopted  by  the  bank  for  controlling  the  vol- 
ume of  circulation  and  maintaining  its  credit  was  the  sale  of 
bank  money  for  specie  or  specie  for  bank  money  in  such 
amounts  as  the  public  might  require.  Regular  agents  of  the 
bank  were  charged  with  these  transactions  and  kept  the  pre- 
mium on  bank  money  within  narrow  limits  and  its  value 
substantially  unchanged.  It  was  supposed  until  the  last 


1  Wealth  of  Nations,  II.,  61. 


THE  BANKS  OF  NORTHERN  EUROPE.  289 

half  of  the  eighteenth  century  that  the  bank  had  sacredly 
fulfilled  its  obligations  to  keep  in  the  vaults  the  exact  amount 
of  coin  and  bullion  represented  by  the  bank  money  outstand- 
ing. The  affairs  of  the  bank  were  kept  secret  by  the  small 
committee  of  the  city  government  which  was  charged  with 
its  administration,  and  it  was  not  generally  known  that  as 
early  as  1657  individuals  had  been  permitted  to  overdraw 
their  accounts  and  that  in  later  years  enormous  loans  of 
specie  had  been  made  to  the  Dutch  East  India  Company. 
The  truth  became  public  property  in  the  winter  of  1789  and 
1790.  The  premium  on  bank  money,  which  was  usually 
kept  above  four  per  cent.,  then  fell  below  two  per  cent, 
and  in  August,  1790,  disappeared.  The  bank  failed  to  pro- 
tect its  credit  by  purchasing  bank  money  on  an  adequate 
scale  and  it  was  represented  that  large  purchases  would  be 
followed  by  a  heavy  export  of  bullion  to  the  injury  of  com- 
merce. The  possibility  of  deception  came  to  an  end  when 
on  November,  12,  1790,  a  notice  was  issued  that  silver  would 
be  sold  to  the  holders  of  bank  money  at  a  rate  equivalent  to 
ninety  per  cent,  of  their  claims.  It  was  substantially  an  ad- 
mission of  insolvency  and  the  debt  was  assumed  in  1791  by 
the  government  of  the  City  of  Amsterdam.  The  effort  was 
made  to  put  the  bank  again  on  its  feet,  but  the  time  for  such 
banks  had  passed,  the  position  of  Amsterdam  as  a  commercial 
centre  had  changed,  the  bank  was  closed  by  a  royal  decree 
of  December  19,  1819,  and  the  small  amount  of  bank  money 
outstanding  was  soon  after  paid  off. l 

The  Bank  of  the  Netherlands  (de  Nederlandsche  Bank}  was 
authorized  by  the  government  in  1814,  after  it  became  evi- 
dent that  the  Bank  of  Amsterdam  could  not  be  revived. 
The  privilege  of  the  bank  was  twice  renewed  for  twenty-five 
years,  carrying  its  charter  to  March  31,  1889.  The  next  re- 
newal was  nominally  only  for  fifteen  years,  until  March  31, 


1  A  summary  of  the  result  of  the  researches  of  the  latest  scholar- 
ship regarding  the  Bank  of  Amsterdam,  based  in  part  upon  the  his- 
tory of  the  bank  by  W.  C.  Mees,  formerly  president  of  the  Bank  of 
the  Netherlands,  is  presented  by  Prof.  Dunbar  in  his  valuable  work 
on  The  Theory  and  History  of  Banking,  82-105. 


290         HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

1904,  but  an  extension  often  years  was  to  be  tacitly  assumed 
unless  the  abrogation  of  the  privilege  was  decreed  by  the 
state.1  A  further  extension  to  1919  was  made  by  a  law  of 
December  31,  1903,  when  some  changes  were  made  in  the 
share  of  the  state  in  the  bank's  profits.2  The  law  of  Decem- 
ber 22,  1863,  left  open  the  possibility  of  establishing  other 
banks  of  issue  by  special  law,  but  the  Bank  of  the  Nether- 
lands has  been  in  fact  the  only  bank  of  issue  in  Holland 
since  its  establishment.  The  capital  of  the  bank  was  origin- 
ally 5,000,000  florins  ($2,000,000)  and  has  been  increased 
from  time  to  time  to  10,000,000,  15,000,000,  and  20,000,000 
florins  ($8,000,000).  The  bank  is  not  a  public  institution, 
but  the  state  subscribed  in  1863  for  one  thousand  shares  at 
115,  which  were  sold  on  June  i,  1864,  at  190.  The  govern- 
ment exercises  supervision  through  a  special  commissioner 
paid  by  the  bank,  and  the  president  and  secretary  are  named 
by  the  king. 

The  Treasury  shares  in  the  profits  of  the  bank  when  they 
exceed  a  fixed  amount.  Under  the  law  of  1888,  dividends  of 
five  per  cent,  were  to  be  paid  to  the  shareholders,  even  if  it 
was  necessary  to  recur  to  the  reserve  fund  to  make  up  the 
amount.  Ten  per  cent,  of  profits  was  then  to  go  to  the  re- 
serve fund  until  it  reached  twenty-five  per  cent,  of  capital. 
The  remaining  profits  were  to  be  divided  equally  between 
the  state  and  the  shareholders  until  the  total  dividend  allotted 
to  the  latter  reached  seven  per  cent.,  after  which  they  were 
to  receive  only  a  third.  The  portion  going  to  the  share- 
holders was  further  curtailed  by  the  law  of  1903,  by  the 
reduction  of  their  initial  dividend  to  three  and  one  half  per 
cent.  Then,  after  allotments  to  reserve  and  to  the  manage- 
ment, the  state  was  to  receive  two-thirds  of  the  balance  and 
the  shareholders  only  one-third.  In  case  of  the  refusal  of 
further  privileges  in  1919,  the  shareholders  are  to  retain  the 
reserve  existing  on  March  31,  1889,  but  half  the  subsequent 
accretions  go  to  the  state.3 


194. 

*'R.aiBa\ovich,\n£<;onomiste£uropeen,  March  13,  1908,  XXXIII.,  328- 
1  Economists  Europ&en,  March  13,  1908,  XXXIII.,  328. 


THE  BANKS  OF  NORTHERN  EUROPE.  2gl 

There  is  no  fixed  limit  upon  the  note  issues  of  the  Bank 
of  the  Netherlands,  but  the  decree  of  August  16,  1884,  fixed 
the  proportion  of  the  metallic  reserve  at  forty  per  cent,  of  the 
aggregate  of  notes  and  deposits.  The  law  imposes  no  re- 
strictions on  the  proportion  of  gold  and  silver,  but  since  1872 
the  bank  has  ceased  to  buy  silver  and  has  added  as  much  as 
possible  to  its  gold.  Holland  suspended  the  free  coinage  of 
silver  in  December,  1877,  and  has  maintained  her  monetary 
system  at  parity  with  gold  by  treating  the  silver  coins  as 
tokens,  redeemable  in  gold. 

The  monetary  system  maintained  by  the  Bank  of  the 
Netherlands  is  of  peculiar  interest,  because  of  the  demonstra- 
tion which  it  affords  that,  within  narrow  limits  at  least,  it 
is  possible  to  maintain  the  gold  standard  with  very  little 
gold  and  while  the  money  of  circulation  is  chiefly  of  silver 
and  paper.  The  bank  pursues  a  policy  directly  opposite 
from  that  of  the  Bank  of  France,  by  furnishing  gold  freely 
for  export  and  sparingly  for  domestic  circulation.  The  pur- 
pose of  this  policy  is  to  maintain  the  parity  of  foreign  ex- 
change, because  of  the  conviction  that  a  refusal  to  furnish 
gold  for  export  would  put  the  metal  at  a  premium  and  pre- 
cipitate the  country  upon  a  silver  basis.  This  danger  was  a 
serious  one  in  1883.  The  gold  reserve,  which  had  been  at 
56,924,000  florins  at  the  close  of  1880,  declined  in  October, 

1882,  to  11,306,638  florins  and  in  February,  1883,  to  5,365,- 
091  florins  ($2,150,000).     A  bill  was  promptly  introduced  in 
the  States-General,   authorizing   the  melting  of  25,000,000 
florins  in  old  pieces  of  two  and  a  half  florins  and  their  sale 
as  bullion,  in  order  to  obtain  gold.     The  bill  did  not  become 
law  until  March  4,  1884,  but  the  exchanges  in  the  meantime 
became  favorable  and  the  stock  of  gold  rose  on  April  21, 

1883,  to   31,000,000  florins  ($12,400,000).     The  bank  now 
stands  ready  to  furnish  gold  for  export  or  to  furnish  silver  at 
its  bullion  value,  while  the  old  stock  of  large  silver  coins  is 
being  gradually  reduced  by  subsidiary  coinage  for  Holland 
and  Java.1 


1  Bimetallism  in  Europe,  Sen.  Ex.  Doc.  34,  soth  Cong.,  ist  Sess.,  33. 


HISTORY  OF  MODRRN  BANKS  OF  ISSUE. 


The  capacity  of  the  bank  to  furnish  gold  on  demand  was 
severely  tested  in  1906  and  1907  as  the  result  of  financial 
pressure  in  other  countries  and  the  necessity  for  remittances 
to  pay  for  foreign  securities,  of  which  the  Dutch  public  are 
large  buyers.1  The  discount  rate,  which  had  been  at  three 
per  cent,  for  over  a  year,  was  advanced  to  three  and  one-half 
per  cent,  on  April  28,  1906 ;  to  four  and  one-half  per  cent,  on 
May  4th ;  to  five  per  cent,  on  October  n,  1906 ;  and  to  six 
per  cent,  on  March  12,  1907.  This  rate  was  not  long  main- 
tained and  the  bank  went  through  the  American  panic  with 
a  rate  of  five  per  cent.,  fixed  on  April  23,  1907.  The  bank- 
ing year  ending  March  31,  1907,  closed  with  the  gold  stock 
reduced  from  72,668,470  florins  to  61,819,600  florins  ($24,- 
727,800)  ;  but  the  next  year  witnessed  a  reflux  of  the  yellow 
metal,  as  the  result  of  the  diminished  demand  for  credit,  and 
found  the  reserve  at  about  97,000,000  florins.  It  was  de- 
clared by  the  management  of  the  bank  that  "  the  Netherlands 
maintained  the  free  gold  market  on  which  our  credit  abroad 
is  based,  but  we  had  to  guard  against  excessive  withdrawals 
from  our  vaults  of  the  metal  that  is  absolutely  necessary  to 
maintain  the  stability  of  value  of  the  medium  of  exchange. ' ' 
How  large  is  the  presentation  of  notes  to  the  bank  for  specie 
and  the  counter  deposit  of  gold  for  notes  may  be  judged  by 
the  following  figures  for  representative  years  : 

Exchanges  at  the  Bank  of  the  Netherlands. 


YEAR  ENDING 
MARCH  31. 

SPECIE  PAID  FOR  NOTES. 

NOTES  PAID  FOR  SPECIE. 

(In  florins  =  $0.402.) 

1875 

34,098,655 

27,695,070 

1880 

42,460,765 

32,254,525 

1885 

51,657,925 

35,714,565 

1890 

56,338,280 

37,843,825 

1895 

71,856,675 

53,458,120 

1897 

86,358,645 

61,617,365 

1899 

94,754,665 

67,505,170 

1900 

100,994,655 

70,349.365 

1902 

104,058,125 

70,951,255 

1904 

112,407,390 

78,461,545 

1905 

112,589,890 

84,581,550 

1906 

105,795,960 

78,796,920 

1907 

113,828,340 

87,606,320 

London  Bankers'  Magazine \  December,  1907,  I/XXXIV.,  749.     It 


THE  BANKS  OF   NORTHERN  EUROPE. 


293 


The  gradual  expansion  of  the  business  of  the  Bank  of 
the  Netherlands,  upon  the  average  for  five-year  periods  and 
in  recent  years  is  indicated  by  the  following  table ': 

Accounts  of  the  Netherlands  Bank. 


AVERAGE  FOR 
YEAR  ENDING 
MARCH  31. 

NOTES  IN 
CIRCULATION 

METALLIC 
STOCK. 

DISCOUNTS 
AND  LOANS. 

CURRENT 
ACCOUNTS. 

(In  florins=4o.2  cents.) 

1869-74 

154,700,000 

110,940,000 

91,610,000 

29,72O,OOO 

1874-79 

186,820,000 

140,230,000 

IOO,74O,OOO 

36,350,000 

1879-84 

190,420,000 

I3O,O2O,OOO 

92,960,000 

14,850,000 

1884-89 

199,020,000 

150,430,000 

85,070,000 

19,050,000 

1889-94 

2O2,2IO,OOO 

I23,98O,OOO 

I06,I60,000 

11,500,000 

1894-99 

206,910,000 

124,410,000 

105,590,000 

6,270,000 

1902-1903 

230,960,000 

I35,970,COO 

117,960,000 

5,8lO,OOO 

1903-1904 

234,700,000 

129,780,000 

I28,O4O,OOO 

6,O5O,OOO 

1904-1905 

247,370,000 

143,590,000 

I27,8lO,OOO 

7,730,000 

1905-1906 

268,850,000 

152,150,000 

140,030,000 

5,090,000 

The  balance  sheet  of  March  31,  1907,  showed  total  lia- 
bilities of  300,344,532  florins,  of  which  20,000,000  florins 
was  on  account  of  capital,  259,552,488  florins  ($103,821,000) 
on  account  of  note  issues,  and  11,138,760  florins  on 
current  accounts. 

Banking  in  Sweden. 

The  three  countries  of  the  Scandinavian  Union, — Sweden, 
Norway,  and  Denmark, — have  an  uniform  monetary  system 
based  upon  the  gold  standard  with  the  crown  as  the  unit, 
worth  twenty-six  and  eight-tenths  cents  ($0.268)  in  United 
States  money,  but  each  country  has  a  banking  system  of  its 
own.  The  State  Bank  of  Sweden  (Sveriges-Riksbank)  was 
founded  November  30,  1656,  and  to  Palmstruch,  its  founder, 
is  attributed  the  first  use  of  bank  bills  as  credit  money,  not 
fully  covered  by  the  coin  reserve.  The  bank  became  a  pub- 
lic institution  in  1668,  and  its  capital  is  furnished  by  the 

is  the  opinion  of  experts  in  Holland  that  holdings  of  American 
securities  there  are  over  $400, 000,000, — not  greatly  less  than  all 
other  Continental  bourses. — U.  S.  Consular  Reports,  July  12,  1907,  8. 
1  Jaarcijfers  voorhet  Koninkrijk  der  Nederlanden,  Rijk  in  Europa, 
1905,  222. 


294  H1STOR  Y  OF  MODERN  BANKS  OF  ISSUE. 

nation,  but  the  administration  is  under  the  charge  of  a  com- 
mission chosen  by  the  Diet  and  is  not  responsible  to  the 
executive  department  of  the  government.  The  capital  of 
the  bank,  prior  to  the  reform  of  1897,  was  25,000,000  crowns 
($6,700,000)  with  a  reserve  of  5,000,000  crowns,  and  it  was 
allowed  to  issue  notes  to  the  amount  of  both,  plus  its  credits 
with  foreign  banks  and  its  metallic  reserve.1  The  reserve 
was  not  allowed  to  fall  below  10,000,000  crowns.  The  notes 
are  a  legal  tender  by  the  Swedish  constitution  in  Sweden 
and  are  receivable  by  public  depositaries. 

The  private  banks  grew  up  at  first  without  regulation,  but 
became  subject  to  general  law  in  1864.  A  new  law  of  Janu- 
ary i,  1887,  imposed  certain  general  conditions  upon  these 
banks,  most  of  which  are  still  in  force. a  The  capital  of  each 
is  required  to  be  at  least  1,000,000  crowns  ($268,000),  the 
charter  runs  for  ten  years,  and  the  shareholders  are  responsi- 
ble only  for  the  amount  of  their  shares. 

Sweden  in  1897  followed  other  important  European  states 
in  taking  measures  to  concentrate  the  power  of  note  issue 
in  a  single  institution.  The  nucleus  of  the  new  system  ex- 
isted in  the  State  Bank,  whose  character  was  not  changed 
as  to  ownership  and  organization,  but  which  was  given  by 
the  law  of  May  12,  1897,  larger  powers  and  more  exclusive 
privileges.  The  changes  as  to  note  issues  did  not  become 
fully  effective  until  January  i,  1904,  but  the  capital  of  the 
State  Bank  was  increased  in  the  meantime  to  50,000,000 
crowns  ($13,400,000)  and  the  way  paved  for  gradually  elimi- 
nating the  circulation  of  the  private  and  joint  stock  banks. 
As  early  as  1879  tne  privilege  of  issuing  notes  for  five  crowns 
($1.34)  was  reserved  to  the  State  Bank,  and  in  1887  its  limit 
of  issue  was  raised  to  45,000,000  crowns  and  the  cash  hold- 
ings were  required  to  be  18,000,000  crowns.  The  law  of 
1897,  consolidating  note  issues,  raised  the  maximum  limit 
of  circulation  to  100,000,000  crowns  and  required  minimum 
cash  holdings  to  be  25,000,000  crowns,  all  in  gold.  A  sub- 


1  Muhleman,  149. 
219. 


THE  BANKS  OF  NORTHERN  EUROPE.  2Q$ 

sequent  modification  of  this  law,  which  took  effect  January 
i,  1902,  raised  the  gold  requirement  to  40,000,000  crowns, 
but  permitted  the  balance  to  be  covered  by  foreign  govern- 
ment bonds,  foreign  and  inland  bills,  and  Swedish  bonds 
quoted  on  foreign  stock  exchanges.1 

Provisions  were  made  in  the  law  of  1897  f°r  compensation 
to  the  private  banks  for  the  privilege  of  note  issue  withdrawn 
from  them.  It  was  the  motive  of  the  law  to  perpetuate  them 
as  joint  stock  banks  and  to  induce  them  to  continue  to  grant 
the  same  accommodation  to  commerce  as  before.  To  these 
ends  banks  retiring  their  circulation  before  the  end  of  1905 
were  given  a  credit  with  the  State  Bank  against  approved 
collateral  at  a  rate  two  per  cent,  below  the  published  discount 
rate  (but  not  below  a  rate  of  two  per  cent.),  and  rediscounts 
at  a  rate  not  exceeding  two-thirds  of  the  published  rate. 
The  amount  of  each  of  these  privileges  was  fixed  at  one-half 
the  circulation  of  the  bank  on  January  i,  1896,  and  was  con- 
ditioned on  the  requirement  that  the  local  bank  should  not 
discontinue  any  branch  existing  on  that  date.  For  those 
banks  which  kept  their  circulation  until  the  beginning  of 
1904,  the  privilege  of  rediscount  was  limited  to  forty  per  cent, 
of  their  issues.2  The  number  of  banking  offices  of  the  banks 
of  issue  existing  in  1903  was  about  183,  of  which  24  had 
come  into  existence  since  1896,  and  several  belonged  to  banks 
which  withdrew  promptly  from  the  note-issuing  field  and 
continued  as  joint  stock  banks. 

The  concentration  of  the  power  of  note  issue  has  tended  to 
a  concentration  of  metallic  reserves,  but  has  left  the  State 
Bank,  as  before,  dependent  on  its  note  issues  for  its  resources, 
while  the  private  and  joint  stock  banks  depend  upon  their 
deposits.  This  wide  divergence  in  character  of  operations 
by  these  different  types  of  banks  is  revealed  by  the  statistics 
of  the  condition  of  the  different  classes  of  banks  on  January 
i,  1907,  after  the  new  system  had  been  in  full  operation  for 
three  years." 

1  Flux,  in  Yale  Review,  February,  1903,  XI.,  364. 

2  Ibid.,  369. 

3  Economiste  European,  June  5,  1908,  XXXIII.,  732. 


296  HISTOR  Y  OF  MODERN  BANKS  OF  ISSUE. 

Condition  of  Swedish  Banks,  January  iy  1907 


ITEMS. 

STATE  BANK.. 

PRIVATE  BANKS 

JOINT  STOCK 
BANKS. 

Capital  

(I 
50,000,000 

8,735,ooo 
3,245 

203,757,814 
74,428,265 
68,509,757 
153,781,160 

Q  crowns  =$0.268.) 
125,300,000 
79,164,438 
431,502  028 

18,478,273 
22,666,539 
34,339,000 
255,929,602 

181,371,580 
86,922,419 
388,706,087 

20,435,829 
29,317,062 
40,926,839 
298,115,938 

Reserve 

Deposits  

Bank  notes  and  drafts 
outstanding  

Specie  on  band 

Due  from  banks  .... 
Discounts        . 

The  note  circulation  of  the  Royal  Bank,  which  was  201,- 
911,044  crowns  at  the  close  of  1906,  declined  to  190,115,534 
crowns  ($50,810,000)  at  the  close  of  1907.  The  gold  reserve 
declined  only  from  71,929,953  to  70,322,453  crowns,  while 
discounts  increased  from  149,596,027  to  191,954,154  crowns 
and  deposits  and  current  accounts  from  45,121,588  to  61,- 
139,290  crowns.  Net  profits,  which  in  1906  were  7,133,396 
crowns,  were  in  1907,  9,639,023  crowns  ($2, 575, coo).1 

The  Bank  of  Norway. 

The  Bank  of  Norway  (Norges  Bank)  was  founded  June  14, 
1816,  with  its  head  office  at  Drontheim  and  branches  in 
leading  towns  of  the  province.  Its  capital  was  raised  by 
a  tax  upon  landed  property  and  the  land-holders  became 
shareholders  in  the  bank  according  to  their  respective  pay- 
ments. The  original  capital  of  the  bank  was  2,000,000 
specie  dollars,  and  circulation  was  issued  provisionally  in  the 
proportion  of  five  dollars  to  two  dollars  of  the  capital.  One 
of  the  purposes  of  the  foundation  of  the  bank  was  the  im- 
provement of  agriculture,  the  discount  of  commercial  bills 
being  at  first  only  a  secondary  consideration.  Loans  were 
made  by  means  of  note  issues  upon  land  to  an  amount  not 
exceeding  two- thirds  of  the  valuation,  and  the  borrower 
made  a  semi-annual  payment,  including  not  only  interest, 
but  five  per  cent,  annually  of  the  principal,  which  was  thus 


J&conontiste  Europten,  April  17,  1908,  XXXIII.,  507. 


THE  BANKS  OF  NORTHERN  EUROPE.  297 

liquidated  in  twenty  years,  like  some  modern  mortgage  loans. 
The  attempt  to  float  a  paper  currency  upon  land  values 
resulted  in  failure  and  the  notes  of  the  bank  in  1822  could 
be  exchanged  at  Hamburg  at  the  rate  of  only  $187.50  for 
$100  in  silver.  The  Storthing  was  compelled  to  pass  a  law 
reducing  the  value  of  the  notes  by  providing  that  190  in 
paper  should  be  redeemed  in  the  proportion  of  100  in  silver.1 
The  value  of  the  notes  gradually  rose  and  the  bank  was  put 
upon  a  sounder  basis. 

The  present  capital  of  the  Bank  of  Norway  is  15,500,000 
crowns  ($4,150,000),  but  by  the  last  renewal  of  the  charter 
(by  the  law  of  May  19,  1900)  may  be  raised  to  25,000,000 
crowns.  The  bank  is  authorized  to  issue  notes  to  the 
amount  of  35,000,000  crowns  without  metallic  reserve,  and 
to  any  additional  amount  when  fully  covered  by  gold.  One- 
third  of  the  computed  gold  reserve  may  be  on  deposit  abroad 
and  3,000,000  crowns  may  be  deposited  in  the  Bank  of 
Sweden  and  the  National  Bank  of  Denmark.  A  leaf  is 
taken  from  the  experience  of  Germany  in  the  provision  that 
additional  notes  may  be  issued,  upon  notice  to  the  govern- 
ment, under  a  tax  of  six  per  cent.  These  changes  in  favor 
of  greater  freedom  of  note  issue  were  largely  the  result  of 
the  monetary  pressure  of  1899,  which  compelled  the  bank  to 
raise  its  discount  rate  first  to  six  per  cent,  and  towards  the 
end  of  the  year  to  six  and  one-half  per  cent.,  and  to  exceed 
the  authorized  note  issue  for  the  first  time  since  its  founda- 
tion.8 The  notes  are  legal  tender  and  are  the  only  credit 
paper  having  general  circulation. 

The  governing  board  of  the  bank  is  named  by  the  Storth- 
ing and  consists  of  fifteen  representatives.  The  actual  ad- 
ministration is  entrusted  to  five  directors  at  the  central  bank 
and  three  at  each  branch,  who  are  also  named  by  the 
Storthing.  The  state  is  a  large  shareholder,  but  the  man- 
agement of  the  bank  is  kept  independent  of  the  Treasury.3 


1  Macleod,  Theory  and  Practice  of  Banking,  II.,  263-64. 

2  Bulletin  de  Statistique,  October,  1901,  L.,  438. 

3  Statistique  Internationale  des  Banques  d' Emission,  Norv£ge,  6-7. 


298 


HISTOR  Y  OF  MODERN  BANK'S  OF  ISSUE. 


The  policy  of  limiting  the  profits  of  shareholders  was  adopted 
by  the  law  of  1900,  in  conformity  with  the  policy  adopted  at 
about  the  same  time  by  France,  Belgium,  Germany,  and 
Austria- Hungary.  The  shareholders  first  receive  dividends 
of  six  per  cent.  Of  the  excess,  ten  per  cent,  is  added  to  the 
reserve  funds,  and  the  remainder  is  divided  equally  between 
the  state  and  the  shareholders ;  but  after  the  portion  of  the 
shareholders  has  reached  ten  per  cent.,  three-quarters  goes 
to  the  state.  * 

The  note  circulation  of  the  bank  has  expanded  with  the 
expansion  of  Norwegian  trade,  but  the  increase  in  discounts 
and  deposits  has  been  shared  to  some  extent  with  other  in- 
stitutions. The  extent  to  which  the  permission  to  keep  the 
reserve  abroad  has  been  availed  of  is  indicated  by  the  fact 
that  on  December  31,  1905,  the  total  reserve  was  37,779,045 
crowns  and  of  this  amount  13,442,432  crowns  was  on  deposit 
with  foreign  banks.  By  the  close  of  1907  the  amount  on 
deposit  abroad,  including  3,531,035  crowns  in  the  Banks  of 
Sweden  and  Denmark,  was  21,083,922  crowns.  The  follow- 
ing figures  indicate  the  variations  in  some  of  the  principal 
items  of  the  accounts  in  recent  years  *  : 


Accounts  of  the  Bank  of  Norway. 


NOTES  IN 

METALLIC 

DISCOUNTS. 

DEPOSITS. 

CIRCULATION. 

RESERVE. 

(In  crowns  =  $0.268.) 

1885 

37,147,456 

28,675,610 

23,275,493 

6,653,796 

1890 

49,670,702 

38,895,523 

25,979,248 

6,879,364 

1895 

50,970,375 

36,759,465 

30,693,354 

9,345,183 

1900 

65,611,696 

36,502,201 

48,007,067 

6,120,663 

1902 

62,915,738 

33,523,812 

48,374,428 

8,659,755 

1904 

60,171,033 

36,886,822 

36,173,332 

10,061,198 

1905 

65,664,540 

37,779,045 

40,787,656 

9,980,919 

1906 

1907 

68,935,018 
73,483,136 

46,657,080 
48,451,754 

41,439,433 
45,438,19! 

10,422,715 
9,480,855 

1  Bulletin  de  Statistique,  October,  1901,  L.,  437- 

2  Statistisk  Aarbog  for  Kongeriget  Norge,  1906,  83,    and  prior 
years;    for  1906  and    1907,   Economists  Europ&en,  April    10,    1908, 
XXXIII.,  476. 


THE  BANKS  OF  NORTHERN  EUROPE.  299 

The  National  Danish  Bank. 

The  National  Danish  Bank  was  founded  in  1818  and  has  a 
capital  of  26,752,400  crowns  ($7,000,000).  The  bank  was  the 
successor  of  the  State  Bank  \Rigsbanken],  which  had  been 
created  by  the  government  in  1813  to  restore  order  to  the 
demoralized  financial  system  of  the  country.  A  decree  of 
July  4,  1818,  transferred  the  privileges  of  the  old  bank  to 
the  new  for  a  term  of  ninety  years.  The  government  was 
free  at  the  end  of  this  period,  in  1908,  to  extend  the  privileges 
or  revoke  them.  The  capital  of  the  National  Bank  is  in 
private  hands,  but  it  was  collected  by  an  enforced  levy  upon 
real  estate,  and  the  landowners  became  shareholders  in  the 
bank  for  the  amount  of  the  tax  paid.  The  bank  assumed 
the  obligations  of  the  State  Bank  and  was  unable  to  pay 
dividends  until  1845.  The  dividends  since  that  time  have 
averaged  about  seven  per  cent.  A  decree  of  1873  fixed  the 
limit  of  circulation  not  fully  covered  by  specie  at  27,000,000 
crowns,  but  this  was  increased  by  a  decree  of  November  5, 
1877,  to  30,000,000  crowns.  The  metallic  reserve  was  not 
permitted  in  any  case  to  fall  below  three-eighths  of  the  face 
value  of  the  notes,  and  at  least  12,000,000  crowns  was 
required  to  be  in  gold  coin  or  in  bullion  which  had  been 
actually  delivered  to  the  mint  for  coinage.  The  other  por- 
tions of  the  metallic  reserve  may  be  in  gold  bars  or  foreign 
gold  coin  and  in  foreign  silver  to  an  amount  not  greater  than 
one-third  of  the  entire  fund.1 

By  a  decree  of  1886  net  balances  in  favor  of  the  bank 
at  the  Bank  of  Norway  and  the  Royal  Bank  of  Sweden 
might  be  counted  as  a  part  of  the  legal  reserve.2  The 
notes  are  legal  tender  and  the  amount  varies  considerably 
with  the  seasons. 

The  charter  of  the  bank,  with  the  exclusive  privilege  of 
note  issue,  was  renewed  by  a  law  of  July  12,  1907.  The 
proportion  of  reserve  required  was  increased  to  fifty  per  cent. 


1  Comptroller's  Report,  1895,  Report  of  Minister  John  B.  Risley,  77. 
8  A  History  of  Banking  in  all  the  Leading  Nations,  IV.,  382, 


3OO         HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

of  notes  outstanding,  and  it  was  provided  that  the  bank 
should  from  its  profits  first  pay  750,000  crowns  ($200,000) 
into  the  public  Treasury  and  also  pay  into  the  Treasury  one- 
quarter  of  the  profits  remaining  after  the  distribution  to  the 
shareholders  of  a  dividend  of  six  per  cent.1  As  banking  is 
comparatively  unrestricted  in  Denmark  except  in  the  matter 
of  note  issue,  the  National  Bank  has  encountered  active  com- 
petition from  joint-stock  banks  and  private  bankers  ;  but  its 
circulation  and  general  accounts  have  gradually  increased  in 
volume.  The  average  issue  of  bank-notes  was  about  50,- 
000,000  crowns  for  the  five  years  ending  with  1871  ;  69,000,- 
ooo  crowns  for  the  five  years  ending  with  1881  ;  and  78,000,000 
crowns  ($21,000,000)  for  the  five  years  ending  with  1891. 
The  balance  sheet  for  July  31,  1907, — the  end  of  the  bank's 
fiscal  year, — showed  circulation  of  121,675,000  crowns  ($32,- 
830,000)  ;  a  gold  reserve  of  95,069,000  crowns  ($25,600,000)  ; 
and  commercial  discounts  of  35, 581,000  crowns  ($9,550,000). 
The  National  Bank  took  an  active  part  in  allaying  the 
tendency  to  panic  which  followed  an  important  bank  failure 
in  the  winter  of  1908.  The  pressure  in  Germany  reacted 
upon  all  the  Scandinavian  countries,  and  especially  upon 
Copenhagen,  by  the  withdrawal  of  foreign  capital  from 
Scandinavian  enterprises.2  The  result  was  the  suspension 
on  February  6,  1908,  of  the  Freeholders'  Bank  (Grundejer- 
bank],  followed  by  a  run  on  several  institutions  and  a  serious 
fall  in  the  value  of  bank  shares.  The  Retailers'  Bank 
(Detailhandlerbank)  in  particular  suffered  a  drop  of  twenty 
points  in  its  shares  and  fears  were  entertained  for  its  safety. 
Accordingly,  on  Sunday,  February  9th,  a  meeting  was  called 
by  the  Minister  of  Finance,  at  which  the  National  Bank  and 
the  four  other  leading  banks  were  represented.  It  was 
finally  decided  that  the  Treasury  and  these  five  leading 
banks  should  jointly  undertake  a  full  guarantee  not  only 
for  the  liabilities  of  the  suspended  bank,  but  also  for  the 
Retailers'  Bank.  The  guarantee  was  unlimited,  but  as  a 


1  feconomiste  Europeeny  November  8,  1907,  XXXII.,  602. 
2Iyondou  Economist,  February  15,  1908,  L,XVI  ,  314. 


THE  BANKS  OF  NORTHERN  EUROPE. 


301 


preliminary  step  a  fund  of  20,000,000  crowns  ($5,360,000) 
was  subscribed.1  An  administrative  committee,  presided 
over  by  Falbe  Hansen,  the  eminent  economist,  was  ap- 
pointed to  supervise  the  management  of  the  two  banks 
which  had  become  involved  in  difficulties. 


*  London  Banker?  Magazine,  March,  1908,  LXXXV.,  440. 


CHAPTER  XII. 

THE  BANKS  OF  SOUTHERN  EUROPE. 

Development  of  Banking  in  Switzerland— The  National  Bank  of  the 
Swiss  Confederation — The  Bank  of  Spain  and  its  Entanglements 
with  the  Treasury — Similar  Situation  of  the  Bank  of  Portugal — 
The  Banks  of  Roumania,  Bulgaria,  and  Servia — The  Greek  Banks 
and  the  Effects  of  Specie  Suspension — The  Ottoman  Bank. 

BANKING  in  Switzerland  had  its  earliest  development 
at  Basle  and  Geneva,  which  were  long  noted  for  the 
skill  and  wealth  of  their  bankers,  but  banks  of  issue 
were  not  established  in  either  city  until  1845.  The  first 
Swiss  bank  of  issue  was  established  at  St.  Gall  in  1836. 
The  cantonal  bank  of  Vaud  and  the  Bank  of  Basle  were 
established  in  1845,  tne  Bank  of  Commerce  at  Geneva  in 
1846,  and  the  Bank  of  Geneva  in  1848.  The  incorporation 
of  banks  of  issue  rapidly  spread  among  those  cantons  which 
contained  a  considerable  number  of  merchants,  and  in  1863 
eighteen  banks  had  been  established,  with  forty-two  agencies 
or  branches.  The  aggregate  circulation  of  these  banks  on 
December  31,  1862,  was  18,468,122  francs  ($3,600,000),  the 
cash  reserve  was  19,380,922  francs  and  the  current  accounts, 
representing  deposits,  49, 166,405  francs  ($9,&oo,ooo).1  Eleven 
of  these  eighteen  banks  were  established  with  the  help  of  the 
cantonal  governments  and  the  remainder  were  established  by 
private  funds. 

The  Swiss  banks  preserved  until  1875  a  purely  local  exist- 
ence and  their  operations  and  circulation  rarely  extended 
beyond  the  limits  of  the  canton  in  which  they  were  estab- 


1  Courcelle-Seneuil,  350. 


THE  BANKS  OF  SOUTHERN  EUKOPE.  3°3 

lished,  but  the  growing  needs  of  commerce  invited  co-opera- 
tion and  the  extension  of  banking  facilities.  Some  of  the 
banks  began  to  extend  their  branches  into  other  cantons 
and  others  made  conventions  with  each  other  for  the  mutual 
acceptance  of  their  bills.  It  was  at  this  stage  in  the  devel- 
opment of  Swiss  banking  that  the  Federal  constitution  was 
revised  and  authority  to  legislate  regarding  banks  confided 
to  the  Federal  government.  Protection  against  monopoly 
was  afforded  by  the  provision  of  the  constitution  that  Federal 
legislation  ' '  shall  not  establish  a  monopoly  of  the  issue  of 
bank  bills  nor  decree  their  obligatory  acceptance."  The 
law  of  1875  required  the  Swiss  banks  to  maintain  a  cash 
reserve  equal  to  forty  per  cent,  of  their  notes  in  circula- 
tion and  forbade  any  one  bank  to  issue  circulation  in  excess 
of  12,000,000  francs  ($2,400,000).  Each  bank  was  required 
to  accept  the  notes  of  other  banks  and  to  redeem  them  in 
coin.  The  number  of  banks  at  the  end  of  1873  was  twenty- 
eight  and  their  circulation  was  47, 606,000  francs  ($9,400,000), 
against  which  there  was  a  cash  reserve  of  14,892,796  francs. 
The  Act  of  1875  was  superseded  by  that  of  March  8,  1881, 
which  limited  the  circulation  to  double  the  paid-up  and 
unimpaired  capital  (capital  verse  et  rtellement  existant)  of  the 
banks  and  required  banks  of  issue  to  have  a  capital  of  at 
least  500,000  francs.  The  requirement  of  a  forty  per  cent, 
cash  reserve  was  maintained,  to  be  distinct  and  independent 
of  the  other  reserves  of  the  bank  and  kept  in  a  separate 
account.  The  remainder  of  the  circulation  was  required  to 
be  fully  covered  by  the  deposit  of  securities  or  commercial 
bills.  Weekly,  monthly,  and  annual  reports  are  required 
according  to  a  form  prescribed  by  the  Federal  Council  and 
an  annual  examination  is  made  under  public  authority.1 
The  notes  are  issued  through  the  Federal  inspectorate,  are 
delivered  to  the  banks  as  they  need  them,  and  are  of  a  uni- 
form type.  A  bank  which  renounces  its  circulation  is  required 
to  redeem  the  notes  for  a  certain  time,  to  surrender  the 
redeemed  notes  to  the  Federal  authorities  and  after  the 

1  Alfred  Neymarck,  Article,  "  Banque,"  in  Dictionnaire  d>  Economic 
Politique,  I.,  145. 


304          HISTORY  OF  MODERN  J5ANKS  OF  ISSUE. 

expiration  of  the  period  fixed  for  redemption  to  pay  into  the 
Federal  Treasury  an  amount  of  coin  equal  to  the  face  value 
of  the  notes  still  outstanding.  The  government  then  as- 
sumes the  obligation  of  redemption  for  thirty  years,  after 
which  the  balance  goes  to  a  public  fund. 

The  Swiss  banking  system  as  embodied  in  the  law  of  1881 
was  a  system  of  free  banking  under  government  supervision. 
The  Federal  Assembly  reserved  the  right  to  fix  the  aggre- 
gate of  the  Swiss  circulation  and  to  apportion  it  among  the 
banks,  but  this  right  was  exercised  only  for  the  purpose  of 
compelling  the  banks  to  conform  to  certain  uniform  require- 
ments. Twenty-six  of  the  Swiss  banks  entered  into  a  clear- 
ing arrangement  by  authority  of  a  law  of  June  19,  1882,  for 
the  mutual  exchange  of  notes.  These  banks  were  known 
as  "The  Associated  Banks"  (Banques  Concordataires)  ,  and 
their  notes  circulated  throughout  Switzerland  and  were 
received  by  public  depositaries.  The  central  government 
at  no  time  guaranteed  the  bank-note  circulation  nor  made 
the  notes  legal  tender  in  private  transactions.1  One  of  the 
peculiarities  of  the  Swiss  banks,  however,  was  that  a  majority 
(constituting  twenty-two  out  of  thirty-six  at  the  close  of 
1906)  derived  their  capital  from  the  canton  and  relied  upon 
the  guarantee  of  the  canton  for  support  in  case  of  need. 
They  were  thus  substantially  state  banks,  operating  upon 
a  miniature  stage,  and  out  of  this  fact  grew  many  of  the 
defects  of  banking  conditions  in  Switzerland. 

The  law  of  1881  was  intended  to  remedy  those  defects 
which  grew  out  of  lack  of  uniformity  of  note  issues,  de- 
ficiency of  redemption  facilities,  and  unwarranted  competi- 
tion. As  the  existing  banks  had  grown  up,  however,  under 
varying  conditions,  they  had  many  points  of  weakness  which 
could  not  easily  be  removed  without  a  reconstruction  of  the 
entire  system.  It  was  forbidden  by  the  law  of  1881  to  those 
banks  whose  issues  were  based  on  commercial  paper  to  deal 
in  securities  or  products  for  future  delivery,  to  hold  real 
estate,  or  engage  in  promotions  ;  but  these  transactions  were 


,  216. 


THE  BANKS  OF  SOUTHERN  EUROPE.  305 

not  forbidden  to  those  institutions  where  such  restrictions 
would  have  been  most  salutary — the  banks  whose  circulation 
was  covered  by  securities  or  rested  upon  the  guarantee  of 
the  canton.1  Hence  the  character  of  the  assets  in  respect  to 
ready  convertibility  grew  steadily  worse.  From  1883  to  1900 
commercial  discounts  of  the  Swiss  banks  increased  only 
from  176,000,000  to  181,000,000  francs,  while  holdings  of 
securities  increased  from  219,000,000  to  615,000,000  francs.2 

Efforts  to  promote  the  free  interchange  of  notes  had  begun 
as  early  as  1876,  when  a  concordat  was  signed  by  twenty  - 
one  banks,  by  which  they  received  each  other's  notes  at  par 
and  acted  as  mutual  collecting  agents.  A  central  clearing 
bureau  was  established  at  Zurich,  which  at  first  handled  a 
large  volume  of  business,  but  soon  fell  into  decadence. 3  The 
law  of  1 88 1  was  followed  by  a  new  series  of  agreements, 
which  again  worked  well  for  a  few  years,  only  to  again  fall 
into  disuse.  The  difficulty  of  the  situation  lay  largely  in 
the  competition  among  the  banks  for  business,  which  led 
the  small  banks  to  bid  for  paper  which  the  large  banks  had 
rejected,  and  to  wide  variations  in  rates  of  discount,  which 
prevented  any  intelligent  control  over  exchange.  So  serious 
did  these  evils  become  that  a  new  agreement  was  entered 
into  by  twenty-eight  banks  on  June  3,  1893,  "  with  the  end 
of  protecting  the  metallic  reserves  of  the  country. ' '  Under 
this  agreement  authority  was  given  to  a  committee  repre- 
senting five  leading  banks  to  fix  a  uniform  rate  of  discount, 
below  which  none  of  the  contracting  banks  should  discount 
paper  having  less  than  ten  days  to  run.4 

Even  with  the  best  of  spirit  on  the  part  of  the  banks  of 
issue,  they  could  make  head  with  difficulty  against  the 


1  Bouchmil,  48.     In  1885  only  six  banks  based  their  issues  on  com- 
mercial securities.    They  represented  a  circulation  of  35,000,000  francs 
out  of  a  total  of  about  135,000,000. 

2  Ibid.,  in.     At  the  close  of  1907   the  figures  were  respectively 
260,100,000  and  931,281,000  francs. — Controle  des  Billets  de  Banquc, 
1907,  Tab.  III. 

3  Bouchmil,  33. 

130. 


306         HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

competition  of  the  private  banks,  and  while  some  of  the  latter 
were  drawn  into  an  agreement  in  1894,  tneY  soon  denounced 
it  or  found  means  of  evading  its  requirements.  Modifications 
were  made  in  the  agreement  at  the  general  assembly  of  banks 
of  issue  October  9,  1900,  but  they  were  found  too  burdensome 
and  were  abolished  the  next  year. '  In  the  meantime  a  special 
convention  on  June  9,  1900,  gave  to  a  central  committee  the 
power  to  reduce  the  volume  of  circulation  when  it  judged 
that  market  conditions  required  it.3  Under  this  author- 
ity actual  reductions  were  made  for  several  years,  running 
as  high  as  ten  per  cent,  of  the  authorized  circulation  for  134 
days  in  1903,  and  seven  and  a  half  per  cent,  for  eighty  days 
in  1904.  The  revival  of  business  activity  made  heavier  de- 
mands upon  the  circulation  in  the  next  two  years,  so  that 
the  maximum  reduction  in  1905  was  five  per  cent,  for  eighty- 
eight  days  and  in  1906  five  per  cent,  for  ninety  days.  The 
manner  in  which  the  reduction  was  accomplished  was  by 
the  direct  delivery  of  notes  by  each  bank  to  the  federal 
inspectorate.3  Another  step,  designed  to  check  unwarranted 
competition  for  deposit  accounts,  was  taken  by  a  convention 
at  I/ausanne,  June  10,  1905,  at  which  it  was  decided  that 
the  rate  accorded  by  bankers  on  checking  accounts  payable 
at  sight  should  be  one  and  a  half  per  cent,  below  the  official 
rate  of  discount,  but  in  no  case  higher  than  three  per  cent, 
or  lower  than  one  per  cent.4 

Most  of  the  difficulties  of  the  Swiss  banks  were  accen- 
tuated by  the  persistently  adverse  course  of  exchange  with 
France.  Never  in  any  year  from  1888  to  1908  was  the  average 
rate  for  francs  in  Paris  below  par  in  Switzerland  and  most  of 
the  time  it  was  at  such  a  premium  as  made  it  profitable  to 
import  French  bank-notes,  sell  them  for  Swiss  money  at 
a  premium,  demand  redemption  of  Swiss  notes  in  silver, 
export  the  silver  to  France,  and  again  bring  back  French 


1  Bouchmil,  134. 

2  Ibid.,  124. 

3  Controle  des  Billets  de  Banque,  1906,  29. 
*  Ibid.,  1905,  28. 


THE  BANKS  OF    SOUTHERN  EUROPE.  307 

bank-notes  for  the  renewal  of  the  process.1  At  an  early  date 
after  the  decline  in  silver  bullion  Switzerland  was  practically 
denuded  of  gold,  and  the  profits  on  exchange  were  figured 
upon  the  cost  of  exporting  the  silver  coins  of  the  L,atin 
Union.  While  there  were  certain  seasons  of  the  year  at 
which  exchange  was  more  favorable  to  Switzerland  than  at 
others,  there  were  six  years  between  1889  and  1901  in  which 
the  minimum  rate  was  at  par  or  higher,  indicating  that  coin 
would  not  be  drawn  at  any  time  in  these  years,  in  the  ordi- 
nary course  of  commercial  operations,  to  take  the  road  over 
the  Alps  into  Switzerland.  It  was  out  of  these  conditions 
that  grew  many  of  the  efforts  which  have  been  set  forth  to 
restrict  circulation,  restrain  competition,  and  bring  about 
co-operation  among  the  banks.  So  severe  was  the  burden 
imposed  by  the  drain  of  silver  upon  the  banks  near  the 
French  frontier,  in  compelling  them  to  obtain  specie  at  a 
premium  to  maintain  their  reserve,  that  one  such  bank  sur- 
rendered its  power  of  issue,  and  the  others  in  June,  1899, 
persuaded  their  associates  to  share  a  part  of  the  burden.2 

It  was  inevitable  that  while  these  difficulties,  growing 
out  of  the  lack  of  unity  in  the  Swiss  banking  system,  were 
steadily  growing  more  serious,  a  movement  should  gain 
headway  in  favor  of  centralization.3  Already,  before  the 
law  of  1 88 1  (in  March,  1879)  a  plan  was  presented  to  the 
National  Council  for  a  bank  controlled  by  the  Confederation. 
The  opponents  of  change  were  able  to  put  its  advocates  in  an 
unfavorable  parliamentary  position,  and  the  revision  of  the 
constitution  which  was  required  was  rejected  by  the  people 
in  1880  by  260,126  votes  against  121,099.  The  political  crisis 


1  Cf.  Bouchmil,  136. 

2  Bouchmil,  141. 

3  It  was  declared  by  the  Federal  Council  in  a  report  made  in  the 
summer  of  1904:  "We  know  by  experience  that  it  is  not  possible, 
under  the  existing  system  of  note  issue,  to  hope  for  a  fundamental 
improvement  of  these  unhealthy  conditions  or  the  disappearance  of 
such  dangers.    What  may  be  hoped  with  certainty  is  that  the  creation 
of  the  [national]  bank  will  lead  to  a  sensible  change."  —  Economists 
Europeent]u\y  8,  1904,  XXVI.,  36. 


308         HISTORY  OF  MODERN   BANKS  OF  ISSUE. 

of  1887,  however,  when  war  threatened  between  France  and 
Germany,  led  the  Swiss  banks  to  almost  suspend  the  granting 
of  credit  and  called  renewed  attention  to  their  relative  finan- 
cial helplessness  in  meeting  pressure  from  France.1  After 
various  proposals  to  amend  the  law  of  1881,  an  amendment 
was  adopted  to  Article  39  of  the  constitution,  October  28, 
1891,  authorizing  the  Confederation  to  create  a  central  bank 
under  its  control.  Out  of  this  vote  grew  the  project  of  1896, 
which  authorized  a  central  bank  with  a  capital  of  25,000,000 
francs,  to  »be  provided  two-fifths  by  the  cantons  and  the  re- 
mainder by  the  Confederation.  It  was  upon  this  provision, 
for  creating  a  state-owned  bank  rather  than  a  joint-stock 
bank  with  private  ownership,  that  the  campaign  principally 
turned  when  the  project  was  submitted  to  the  people  by  the 
referendum.  The  French  cantons  opposed  to  the  state  social- 
ism of  the  Germans  rolled  up  immense  majorities  against  the 
project  and  it  was  defeated  by  a  vote  of  255,984  against 

195-764- 

The  deadlock  which  thus  seemed  to  be  created  was  not 
finally  ended  for  more  than  eight  years.  Measures  for  meet- 
ing the  popular  mandate  were  introduced,  however,  on  the 
morrow  of  the  referendum,  and  the  subject  was  carefully 
studied  by  various  Swiss  commercial  bodies.  A  project  of 
law  submitted  by  the  Federal  Council  to  the  parliamentary 
committee  on  March  24,  1899,  was  abandoned  June  28,  1901, 
because  of  disagreement  over  the  location  of  the  head  office 
of  the  bank.2  But  efforts  to  reach  agreement  were  not  relaxed 
and  finally,  after  many  delays,  the  law  of  October  6,  1905, 
created  the  Swiss  National  Bank.  Efforts  to  secure  a  referen- 
dum failed  to  bring  together  more  than  28,137  signatures  out 
of  30,000  required,8  and  on  June  20,  1907,  the  bank  entered 
upon  its  functions. 

The  principal  task  of  the  Swiss  National  Bank  was  declared 
in  its  second  article  to  be  "  to  serve  in  Switzerland  as  regu- 
lator of  the  money  market,  to  facilitate  operations  of  payment, 

1  Bouchmil,  58. 

2  Ibid.,  79. 

3  Controle  des  Billets  de  Banque,  1905,  26. 


THE  BANKS  OF  SOUTHERN  EUROPE.  309 

and  to  provide  for  the  employment  of  circulating  capital. ' ' 
The  ultimate  capital  was  fixed  at  50,000,000  francs  ($9,650,- 
ooo),  of  which  only  half  was  required  to  be  paid  in.  The 
Confederation  no  longer  appeared  as  a  shareholder  in  the 
final  draft  of  the  law  ;  but  the  cantons  were  allowed  to  sub- 
scribe for  two-fifths  of  the  capital  and  the  existing  banks  for 
one-fifth  in  proportion  to  their  circulation  at  the  close  of  1902. 
The  shares  not  thus  taken  were  left  open  to  public  subscrip- 
tion. If  any  shares  were  not  taken  at  first,  they  were  to 
become  the  property  of  the  Confederation,  but  under  a  man- 
date that  they  be  promptly  disposed  of  in  the  market. 

The  government  of  the  bank  was  to  be  exercised  through 
the  general  assembly  of  the  shareholders,  but  a  majority  of 
these,  under  the  division  of  capital  proposed,  might  represent 
the  cantons  and  the  old  cantonal  banks.  Moreover,  the 
council  of  the  bank,  which  was  to  exercise  general  super- 
vision over  its  operations,  was  to  be  made  up  of  twenty-five 
members  chosen  by  the  Federal  Council,  and  only  fifteen  by 
the  shareholders.  The  council  elects  a  committee  of  seven 
members,  to  which  much  of  its  authority  is  delegated,  and 
local  committees  of  from  three  to  seven  members  each.  The 
general  directors,  three  in  number,  are  appointed  by  the 
Federal  Council,  upon  the  nomination  of  the  council  of  the 
bank.  In  them  is  vested  the  authority  to  fix  the  rate  of 
discount,  to  name  officers  and  to  fix  salaries,  subject  to  the 
approval  of  the  Federal  Council.1  There  is  also  a  commis- 
sion of  control  named  each  year  by  the  general  assembly  for 
the  purpose  of  verifying  the  accounts.  The  question  of  the 
location  of  the  head  office  of  the  bank,  which  had  caused 
much  controversy,  was  settled  by  establishing  the  directors 


1  Articles  55  and  63.  M.  Roulleau  regards  these  provisions,  with 
the  absence  of  restrictions  on  loans  to  the  Confederation  and  the  can- 
tons, as  going  too  far  in  the  direction  of  a  purely  state  bank.  He 
says  that  "it  is  necessary  to  trust  entirely  to  the  wisdom  and  discre- 
tion of  the  public  powers  to  resist  the  temptation  to  have  themselves 
accorded  exaggerated  credits  by  the  bank.  This  is  the  danger  of 
every  state  bank  and  this  one  departs  but  little  from  that  type." — 
j-Lconomiste  Europ&en,  November  17,  1905,  XXVIII.,  620. 


310         HISTORY  OF   MODERN  BANKS  OF  ISSUE. 

of  the  departments  of  commercial  operations  and  of  control  at 
Zurich  and  the  director  of  the  department  of  note  issue  at 
Berne. 

The  National  Bank  has  unlimited  power  of  note  issue  so 
far  as  amount  is  concerned ' ;  but  the  provisions  for  the  se- 
curity held  against  it  are  exacting.  There  must  be  a  reserve 
of  forty  per  cent,  in  Swiss  metallic  money  or  foreign  gold. 
The  remainder  of  the  security  must  be  in  domestic  or  foreign 
bills  of  exchange  ;  but  it  is  especially  provided  that  all  the 
demand  obligations  of  the  bank  must  be  covered  by  paper 
of  short  maturities  and  that  the  paper  falling  within  this 
definition  is  that  which  falls  due  or  is  collectible  within  ten 
days.2  Notes  must  be  redeemed  at  par  at  all  offices  of  the 
bank  and  are  accepted  at  par  at  government  offices,  but  can 
be  made  legal  tender  between  individuals  only  in  case  of 
necessity  in  time  of  war.  The  minimum  denomination  of 
notes  is  fifty  francs  ($9.65).  An  earnest  effort  was  made 
in  committee  to  fix  the  minimum  at  twenty  francs,  but  was  , 
defeated  upon  the  ground  that  it  was  desirable  to  encourage 
the  circulation  of  coin. 

The  law  of  1881  had  provided  against  the  perpetuation  of 
vested  right  in  the  power  of  note  issue  by  prescribing  that 
the  grant  of  the  power  should  create  no  right  to  indemnity 
in  case  it  should  be  withdrawn.  The  new  draft  of  Article  39 
of  the  Constitution,  however,  adopted  in  1891,  provided  that 
the  profits  of  the  proposed  central  bank,  after  the  deduction 
of  an  equitable  interest  on  the  capital,  should  go  in  the  pro- 
portion of  at  least  two-thirds  to  the  cantons.  It  was  these 
provisions  which  guided  the  distribution  of  the  earnings  of 
the  National  Bank  under  the  new  law.  Ten  per  cent,  of  net 
profits,  but  not  exceeding  500,000  francs,  is  first  set  aside 
for  the  reserve  fund  ;  a  dividend  of  four  per  cent,  is  allotted 
to  capital;  then  an  allowance  is  made  to  the  cantons,  based 
upon  the  circulation  of  the  old  local  banks  and  upon  popula- 

»  It  was  proposed  in  committee  to  impose  a  tax  of  five  per  cent,  on 
issues  above  a  certain  limit,  as  under  the  German  system  ;  but  this 
was  rejected  by  a  large  majority. — Bouchmil,  202. 

2  Article  21,  Bulletin  de  Stalistique,  November,  1905,  LVIII.,  582. 


THE  BANKS  OF   SOUTHERN  EUROPE.  31! 

tion;  and  the  remainder  is  divided  in  the  proportions  of 
one- third  to  the  Confederation  and  two- thirds  to  the  cantons. 

The  new  law  provided  that  the  local  banks  should  retire 
their  circulation  within  three  years  after  the  National  Bank 
should  have  begun  operations.  The  method  of  doing  this 
was  the  same  as  in  reducing  circulation  under  the  banking 
convention  of  1900 — by  the  surrender  to  the  inspectorate  of 
notes  to  the  amount  of  one-twelfth  of  outstanding  circulation 
at  the  end  of  every  quarter.  In  case  the  notes  could  not  be 
obtained,  a  corresponding  amount  of  specie  was  to  be  sur- 
rendered. The  notes  were  directed  to  be  destroyed;  the 
specie  was  transferred  to  the  National  Bank  for  the  redemp- 
tion of  the  notes  when  received. 

The  average  circulation  of  the  local  banks  increased  from 
66,973,000  francs,  or  24.30  francs  ($4.70)  per  capita  for  the 
ten  years  ending  with  1880,  to  120,964,000  francs,  or  42.65 
francs  ($8.23)  per  capita  for  the  ten  years  ending  with  1890, 
and  187,330,000  francs,  or  59.15  francs  ($11.41)  per  capita 
for  the  ten  years  ending  with  1900.  The  average  circulation 
for  the  year  1880  was  92,851,000  francs;  for  1890,  152,244,- 
ooo;  for  1900,  228,865,900;  and  for  1906,  240,569,159  francs. 
The  cash  held  did  not  vary  greatly  in  the  last  few  years 
before  the  creation  of  the  National  Bank,  having  been 
108,999,979  francs  in  1900,  and  120,102,863  francs  in  1906. 

The  circulation  of  the  National  Bank  stood  on  December 
31,  1907,  including  notes  of  the  local  banks  in  process  of 
retirement,  at  159,220,050  francs  ($30,730,000),  and  its  cash 
consisted  of  75,483,429  francs  in  gold  and  5,860,620  francs  in 
silver.  Although  barely  established  when  the  crisis  of  1907 
in  America  reacted  upon  European  markets,  it  weathered 
the  storm  with  a  rate  of  discount  lower  than  the  maximum 
of  many  other  European  banks.  The  rate  of  five  per  cent., 
which  was  fixed  August  15,  1907,  was  advanced  in  October 
to  five  and  a  half  per  cent.;  but  this  was  the  maximum 
found  necessary,  and  a  reduction  was  made  January  16,  1908, 
to  five  per  cent,  and  January  23d  to  four  and  a  half  per  cent. 

Within  the  next  six  years  the  National  Bank  fulfilled  the 
expectations  of  its  founders  in  protecting  the  gold  stock  of 


312  HIS  TOR  Y  OF  MODERN  BA  NKS  OF  ISS  UE. 

the  country,  while  maintaining  a  favorable  rate  of  discount. 
The  circulation  showed  a  high  degree  of  elasticity ,  declining 
in  1913  from  a  maximum  on  January  2d,  of  335,816,650 
francs  ($64,800,000)  to  a  minimum  on  June  2ist  of  253,562, 100 
francs  ($48,935,000)  and  closing  the  year  at  3 13, 82 1,300  francs. 
The  average  metallic  reserve  was  193,612,000  francs,  which 
amounted  to  71.09  per  cent,  of  the  average  note  circulation. 
The  average  rate  of  discount  in  1911  was  3.70  per  cent.; 
in  1912,  4.20 per  cent;  and  in  1913,  4.81  per  cent.1 

Banking  in  Spain. 

Spain  had  banks  of  deposit  during  her  period  of  prosperity 
in  the  Middle  Ages,  some  of  which,  like  that  at  Barcelona,3 
attained  considerable  celebrity.  These  institutions  disap- 
peared with  the  decadence  of  Spanish  commerce  and  it  re- 
mained for  the  modern  age  to  witness  a  new  development 
of  banking.  An  attempt  was  made  in  the  eighteenth  century 
to  establish  institutions  of  credit,  and  the  Bank  of  San  Carlos, 
which  was  founded  in  1782  at  Madrid,  was  still  in  operation 
when  the  monopoly  of  the  issue  of  circulating  notes  was 
given  to  the  Bank  of  Spain  in  1874.  The  Bank  of  Spain 
was  founded  in  1829,  under  the  name  of  the  Bank  of  San 
Fernando,  but  did  not  enjoy  any  special  privileges  outside 
of  Madrid  and  the  places  where  it  had  branches  until  1856." 
It  was  at  first  a  government  bank  and  its  name  was  changed 
at  the  time  of  the  new  legislation  to  the  Bank  of  Spain,  but 
even  after  1856  the  right  to  incorporate  other  banks  of  issue 
remained  in  the  hands  of  the  government.  Such  banks  had 
been  established  prior  to  1856  by  the  consent  of  the  public 
authorities  in  much  the  same  manner  as  departmental  banks 
might  have  been  established  in  France  before  1840. 

The  legislation  of  January  8,  1856,  was  simply  a  first 
step  in  the  direction  of  monopoly,  like  the  similar  legislation 

1  Controle  des  Billets  de  Banque,  1907,  20. 

'This  bank,  founded  in  1401,  is  said  to  have  been  the  first  bank  of 
deposit  instituted  for  the  accommodation  of  private  merchants. — 
Hallam,  II.,  530. 

3  Courcelle-Seneui! ,  361 . 


THE  BANKS  OF   SOUTHERN   EUROPE.  313 

of  France  and  Germany.  This  law  prescribed  that  there 
should  be  not  more  than  one  bank  of  issue  in  any  commercial 
city.  The  general  provisions  regarding  the  new  banks 
limited  their  issues  to  three  times  their  capital,  obliged  them 
to  keep  a  coin  reserve  of  at  least  one-third  of  their  circulation, 
and  fixed  the  minimum  denomination  of  the  notes  at  one 
hundred  reals  ($5).  The  liberality  of  these  provisions  was 
impaired  by  leaving  to  the  government  the  nomination  of 
the  governor  of  the  Bank  of  Spain  and  of  royal  commissioners 
to  manage  the  independent  banks.  The  Bank  of  Spain 
had  created  up  to  1863  only  two  branches,  at  Valencia  and 
at  Alicanta,  and  there  were  independent  banks  at  Cadiz, 
Barcelona,  Seville,  Malaga,  Corunna,  Santander,  and  Val- 
lodolid.  The  capital  of  the  independent  banks  was  not 
large,  but  in  this  respect  it  was  commensurate  with  the  vol- 
ume of  business  in  Spain.  The  Bank  of  Spain  on  December 
31,  1862,  showed  a  circulation  of  208,380,901  reals  ($10,400,- 
ooo),  a  coin  reserve  of  107,398,201  reals,  deposits  of  235,063,- 
731  reals,  and  a  commercial  portfolio  of  309,231,378  reals 
($15,500,000). 

The  charter  of  the  Bank  of  Spain  was  extended  in  1856 
for  twenty-five  years  and  was  renewed  in  1874  for  thirty 
years.  The  law  of  March  19,  1874,  conferred  upon  the  bank 
the  exclusive  privilege  of  issuing  notes  and  increased  the 
capital  from  132,000,000  reals  ($6,600,000)  to  100,000,000 
pesetas  ($20,ooo,ooo).1  All  the  existing  provincial  banks, 
then  numbering  eighteen,  were  ordered  to  liquidate  their 
circulation  and  transfer  it  to  the  Bank  of  Spain.  The  bank 
is  not  a  state  institution  and  the  state  does  not  participate  in 
its  profits,  but  it  had  the  authority,  under  the  law  of  1874,  to 
require  advances  by  the  bank  to  the  amount  of  125,000,000 
pesetas  ($25,000,000)  upon  the  deposit  of  proper  guarantees. 
The  notes  of  the  bank  were  made  legal  tender  and  limited 
to  five  times  the  capital.  The  capital  was  increased  soon 
after  the  Act  of  1874  to  150,000,000  pesetas  ($30,000,000), 


1  The  present  Spanish   coinage  system  follows  that  of  the  Latin 
Union,  the  peseta  being  the  equivalent  of  the  franc  ($0.193). 


314         HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

which  carried  the  limit  of  circulation  to  750,000,000  pesetas 
($i  50,000,000). * 

The  necessities  of  the  Treasury  led  to  a  new  revision  of 
the  charter  by  the  law  of  July  14,  1891,  and  the  extension 
of  the  privilege  of  the  bank  until  December  31,  1921.  The 
new  charter  authorizes  the  issue  of  notes  to  the  amount  of 
1,500,000,000  pesetas  ($300,000,000)  against  a  cash  reserve 
of  one-third,  of  which  at  least  half  is  required  to  be  kept  in 
gold.2  The  bank  was  required  to  pay  for  these  privileges 
by  advancing  50,000,000  pesetas  to  the  government  annually 
for  three  years  without  interest  or  right  to  reimbursement 
until  the  expiration  of  the  charter.  The  fate  of  the  bank 
has  come  to  be  bound  up  more  and  more  with  that  of  tha 
state  and  it  has  been  only  by  the  bank's  help  that  the  Treas- 
ury was  able  to  meet  its  engagements.  The  Treasury  budget 
showed  a  persistent  deficit,  and  a  floating  debt  was  incurred 
from  1885  to  1893  °f  aSS,000,000  pesetas  ($66,000,000).  The 
permanent  debt  on  June  30,  1892,  was  6,249,639,975  pesetas 
($1,200, 000,000), 3  and  the  charges  on  account  of  the  debt  for 
1894  were  estimated  at  309,219,669  pesetas  ($61,000,000  or 
about  $3.40  per  capita).  Exchange  declined  about  twenty 
per  cent,  and  railway  securities  and  public  stocks  fell  from 
fifteen  to  seventy -five  per  cent,  within  five  years. 

The  commercial  operations  of  the  bank  through  its  fifty- 
eight  branches  became  subordinate  to  the  issue  of  paper 
notes  to  cover  advances  to  the  state.  A  large  proportion  of 
the  assets  were  locked  up  in  loans  on  government  and  for- 
eign securities,  which  increased  rapidly  for  several  years 
because  the  bank  maintained  a  uniform  interest  rate  of  four 
per  cent.,  which  afforded  a  profit  upon  the  difference  between 
this  rate  and  the  higher  rate  earned  by  the  securities.4  This 
difference  was  availed  of  by  shrewd  speculators  to  borrow  on 
securities,  spend  the  loan  on  new  purchases  of  securities, 


'Alfred  Neymarck,  Article,  "Banque,"  in  Dictionnaire  d'Econo- 
mie  Politique,  I.,  140. 

*  Bulletin  de  Statistique,  July,  1891,  XXX.,  72. 
3Raffalovich,  Le  Marche  Financier  en  1893-4,  217. 
* Ibid.,  i8gi,  119. 


THE  BANKS  OF   SOUTHERN  EUROPE.  315 

deposit  them  again  as  guarantee  for  a  larger  loan,  and  so  on 
without  limit.  The  interest  rate  was  raised  in  January,  1892, 
to  five  per  cent.,  but  without  entirely  curing  the  difficulty. 

The  recent  history  of  the  Bank  of  Spain  is  colored  by  the 
results  of  the  war  with  the  United  States  in  1898  and  the 
efforts  since  made  to  restore  order  to  Spanish  finances.  When 
war  broke  out,  the  Spanish  government  had  already  practi- 
cally exhausted  the  credit  of  the  country  and  of  the  bank. 
If  a  sound  financial  policy  had  been  pursued  up  to  this  time, 
the  state  would  have  been  in  a  much  stronger  position  to 
negotiate  loans  or  to  sanction  the  issue  of  bank  paper  under 
specie  suspension,  as  was  done  by  the  Bank  of  France  in  the 
war  with  Germany.  Appeal  was  again  made  by  the  Treas- 
•ury  to  the  Bank  of  Spain,  and  the  circulation  was  forced 
upward  to  1,459,505,000  pesetas  on  February  n,  1899,  after 
peace  had  been  made  with  the  United  States,  but  while 
many  war  expenses  were  still  unpaid.  During  the  war  Paris 
exchange  rose  for  a  time  above  one  hundred  per  cent. — a  de- 
preciation of  fifty  per  cent,  on  the  notes  of  the  bank.  The 
restoration  of  peace  brought  down  the  gold  premium  to 
twenty  per  cent.,  and  the  Spanish  Treasury  struggled  man- 
fully to  pay  the  interest  on  the  foreign  debt,  even  when 
augmented  by  the  refusal  of  the  United  States  to  permit  the 
Cuban  debt  to  continue  a  charge  upon  the  revenues  of  that 
island  or  to  assume  the  debt  of  the  Philippines. 

Contrary  to  the  policy  of  other  great  state  banks,  the  Bank 
of  Spain  did  not  co-operate  heartily  with  the  government  in 
seeking  to  restore  stability  of  exchange.  It  was  declared  in 
the  Cortes  in  1900,  by  one  of  the  ministers,  that  "  The  Bank 
of  Spain  has  departed  from  its  functions  and  failed  completely 
in  its  mission."  '  A  year  later  the  same  minister,  Senor 
Moret,  declared a : 

The  bank  does  not  issue  notes  against  its  assets  ;  its  notes  re- 
spond to  no  operation  of  credit ;  and  when  a  bank  of  issue  does  not 
thus  function,  when  its  assets  are  not  made  up  of  commercial  papei, 


1  Lacombe,  Le  Change  Espagnol,  41. 

*  Mi  tj  a  vile,  La  Crise  du  Change  en  Espagne,  124. 


316         HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

but  of  public  securities  and  Treasury  bills,  there  is  no  rule,  no  means, 
and  no  remedy  for  bringing  its  circulation  to  a  normal  basis. 

The  difficulty  lay  in  the  fact  that  the  greater  the  deprecia- 
tion of  its  notes,  the  greater  were  the  paper  profits  of  the 
bank.  From  1895  to  1899,  its  net  profits  rose  from  34,230,- 
922  pesetas  to  50,400,459  pesetas.  These  profits  were  at- 
tained in  the  face  of  low  rates  of  discount  and  of  interest  on 
loans,  which  with  the  unlimited  power  of  note  issue  per- 
mitted the  encouragement  of  speculation  in  the  same  manner 
as  prior  to  the  war.  Thus,  from  May  25,  1900,  to  March  22, 
1902,  the  rate  of  discount  and  advances  stood  at  three  and 
one  half  per  cent.,  while  the  quotations  of  the  Exterior  debt 
at  Paris  in  February,  1901,  were  at  a  figure  which  afforded 
a  net  return  of  5.54  per  cent.1 

A  resolute  effort  was  made,  however,  to  restore  order  to 
Spanish  finances  with  the  service  of  Seiior  Villaverde  as 
Minister  of  Finance.  He  and  his  successors,  by  economies 
and  the  imposition  of  new  taxes,  succeeded  in  turning  Treas- 
ury deficits  into  a  surplus,  from  1899  down.  The  sum  of 
these  surpluses  for  the  eight  years  ending  with  1906  attained 
the  considerable  amount  of  492,830,832  pesetas  ($90,000,000). 
From  this  surplus  reimbursements  were  made  to  the  bank 
on  account  of  advances  on  Treasury  bills  which  reduced 
their  amount  at  the  close  of  1907  to  210,037,447  pesetas 
($40,000,000)  .a  One  of  the  measures  taken  to  this  end  was 
the  collection  of  customs  dues  in  gold.  The  law  of  February 
23,  1902,  by  which  this  requirement  was  put  in  force,  sought 
to  avoid  an  unwarranted  increase  in  tariff  charges  by  fixing 
a  sliding  scale  of  reduction  based  upon  rates  of  foreign  ex- 
change. The  benefits  of  the  law  in  accumulating  physical 
gold  were  impaired  to  some  extent  by  a  royal  ordinance  of 
April,  1903,  by  which  the  Bank  of  Spain  was  allowed  to 
furnish  gold  to  importers  from  special  gold  accounts  or  by 
the  sale  of  gold  for  silver  and  paper  at  the  current  premium.* 


1  Mitjavile,  130. 

2  Arthur  Houghton,  in  £conomiste  Franfais,  February  8,  1908,  193. 

3  Fochier,  in  Questions  Monttaires  Contemporaines,  491. 


THE  BANKS  OF   SOUTHERN  EUROPE.  317 

The  fact  that  the  Treasury  was  no  longer  a  heavy  buyer  of 
exchange  for  its  remittances  on  account  of  the  debt  and  other 
charges  tended,  however,  to  improve  the  exchange  situation, 
because  the  competition  for  bills  was  henceforth  distributed 
over  a  large  number  of  buyers,  who  were  better  able  than 
the  Treasury  to  conceal  their  operations  and  consult  their 
interests.1 

A  special  project  was  carried  out  in  1903  for  reducing  the 
range  of  fluctuations  in  exchange  due  to  speculation.  The 
railways,  which  had  heavy  remittances  to  make  at  certain 
dates  to  Paris  for  interest  on  their  bonds,  found  that  on 
such  dates  the  price  of  bills  of  exchange  in  Spanish  currency 
was  sharply  advanced.  The  evil  was  partially  remedied  by 
opening  a  credit  at  two  leading  French  banks  of  50,000,000 
francs  in  favor  of  the  Bank  of  Spain.  The  purchase  price  of 
bills  was  fixed  from  time  to  time  by  a  syndicate  committee 
and  the  different  railways  agreed  not  to  bid  against  one 
another  for  bills  at  a  higher  price.3  This  operation  involved 
in  effect  the  borrowing  of  the  amount  needed  to  meet  de- 
ficiencies in  the  amount  of  bills  of  exchange  offered,  and  for 
a  few  months,  by  careful  management  on  the  part  of  the 
Bank  of  Spain  in  gathering  up  local  bills  in  different  cities, 
exchange  was  kept  fairly  steady ;  but  the  credit  in  Paris 
was  exhausted  within  a  year  and  the  experiment  was  not 
sufficiently  successful  to  lead  to  its  renewal.8 

One  of  the  aims  of  Sen  or  Villaverde  was  the  revision  of 
the  charter  of  the  bank  in  order  to  restore  it  to  its  com- 
mercial functions.  The  law  of  May  13,  1902,  dealing  with 
this  subject  prescribed  that  the  Treasury  should  reimburse 
to  the  bank  before  December  31,  1911,  the  amount  of  obliga- 
tions in  its  assets  represented  by  Treasury  certificates.  The 

1  Favre,  Les  Changes  DeprZci&S)  73. 

*&COHOmisU  Europeen,  January  23,  1903,  XXIII.,  107. 

3  Vide  Economists  Europ&en,  January  24,  1904,  XXV.,  156.  Its 
failure  was  predicted  by  Mitjavile  on  the  ground  that  the  available 
bills  would  be  largely  absorbed  by  those  having  obligations  to 
meet,  who  could  not  afford  to  wait  for  the  syndicate  to  appear  in 
the  market  and  reduce  rates  and  would  therefore  pay  any  rate 
necessary  to  obtain  francs. — La  Crise  du  Change  en  Espagne,  151. 


318          HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

Treasury  was  forbidden  to  borrow  of  the  bank  except 
by  authority  of  law.  The  maximum  limit  of  circulation 
against  which  only  a  reserve  of  one-third  was  required  was 
reduced  to  1,200,000,000  pesetas.  Of  the  required  reserve 
of  400,000,000  pesetas,  one-half  was  required  to  be  in  gold. 
Against  the  next  300,000,000  pesetas  in  notes  issued,  forty 
per  cent,  was  required  to  be  in  gold  and  the  remainder  up  to 
a  total  metallic  reserve  of  sixty  per  cent,  might  be  in  silver. 
Against  the  remaining  500,000,000  pesetas  which  the  bank 
was  authorized  to  issue,  fifty  per  cent,  was  required  to  be  in 
gold  and  the  remainder,  up  to  a  total  of  seventy  per  cent. , 
might  be  in  silver.1  Accounts  in  Paris,  London,  and  Berlin 
could  be  counted  as  gold. 

More  significant  of  the  determination  of  Senor  Villaverde 
was  a  section  of  the  agreement  of  July  17,  1902,  between  the 
Treasury  and  the  bank,  by  which  it  was  declared  that  the 
bank  ' '  would  favor  by  a  special  rate  of  interest  the  use  of 
commercial,  industrial,  and  agricultural  credit  by  accepting 
for  discount  in  equal  measure  paper  arising  from  these  dif- 
ferent sources. ' '  *  One  of  the  steps  directed  to  this  end  was  to 
make  speculative  loans  on  the  public  securities  less  attractive 
to  the  public  and  the  bank  by  increasing  the  rate  of  discount. 
The  rate  was  raised  in  1902  to  four  per  cent,  and  in  Septem- 
ber, 1903,  to  four  and  a  half  per  cent.,  at  which  it  remained 
fixed,  even  during  the  crisis  in  other  countries  in  1907.  It 
was  admitted,  however,  in  the  annual  report  of  1907,  that 
the  reforms  sought  by  the  law  of  1902  were  not  capable  of 
immediate  realization,  that  it  was  impossible  to  improvise 
the  substitution  for  assets  consisting  of  securities  of  assets 
exclusively  commercial,  because  this  would  require  the  find- 
ing of  resources  which  the  country  still  unfortunately  lacked.9 


1  Bulletin  de  Statistique,  July,  1902,  1,11.,  91. 

2  Mitjavile,  208. 

z£conomiste  .Frangais,  April  18,  1908,  565.  Doubt  is  thrown  by 
Favre  upon  the  earnestness  of  the  bank  in  seeking  to  restore  sound 
conditions.  He  declared  that,  "spurred  on  by  a  minority  of  specu- 
lators and  exporters  who,  at  least  for  the  time,  have  an  interest  in 
seeing  high  exchange,  the  Bank  of  Spain  thinks  only  of  profiting  by 


THE  BANKS  OF    SOUTHERN  EUROPE.  319 

At  the  session  of  the  Cortes,  however,  in  the  summer  of 
1908  was  taken  a  final  step  which,  when  carried  out,  should 
relieve  the  bank  of  the  subordination  of  its  commercial  func- 
tions to  those  of  the  government  and  lead  to  the  ultimate 
restoration  of  stable  exchange  on  a  gold  basis.  This  was 
the  enactment  of  a  law,  providing  for  the  issue  of  four  per 
cent,  bonds  running  for  fifty  years,  to  the  amount  of  160,- 
000,000  pesetas,  for  the  exclusive  purpose  of  taking  up  the 
outstanding  Treasury  certificates  in  circulation  and  in  the 
vaults  of  the  bank.  These  certificates  were  to  be  received 
in  payment  for  the  new  issue,  which  was  offered  at  85^.' 

The  circulation  of  the  bank  at  the  close  of  1907  was  1,557,- 
000,000  pesetas  ($300,000,000),  which  was  an  increase  of 
33,000,000  pesetas  over  the  close  of  1906,  but  was  a  decrease 
of  about  80,000,000  pesetas  as  compared  with  1901.  One  of 
the  difficulties  which  the  bank  encountered  in  maintaining 
the  reserve  required  by  law  was  the  steady  accumulation  of 
silver  in  its  vaults  as  the  public  preference  grew  for  paper, 
as  in  France  prior  to  1892.  The  proportions  of  gold  and 
silver  were  nearly  the  same  at  the  close  of  1897.  Gold  was 
not  paid  out  by  the  bank,  so  that  what  was  obtained  it  was 
possible  to  hold.  The  decline  in  value  of  the  bank  paper 
caused  by  the  war  with  America  carried  it  for  a  time  below 
the  bullion  value  of  the  silver  coins,  and  reduced  the  silver 
in  the  bank  from  267,900,000  pesetas  on  March  31,  1898,  to 
112,900,000  pesetas  on  June  30,  1898.  From  this  point, 
however,  recovery  began  in  the  value  of  paper  and  this  led 
to  an  increasing  current  of  silver  coins  into  the  bank.  By 
the  close  of  the  year  1900  the  amount  of  gold  stood  at  350,- 
000,000  pesetas,  and  silver  at  400,500,000  pesetas.  By  the 
close  of  1907  gold  had  risen  only  to  391,000,000  pesetas  ($75,- 
460,000),  while  the  silver  in  the  bank -vaults  amounted  to 
642,000,000  pesetas  ($123,900,000). 

The  commercial  discounts  showed  an  increase  at  Madrid 


the  unfortunate  monetary  situation  to  realize  large  profits  from  the 

exchanges  and  the  issue  of  paper  money." — Les  Changes 

70. 

i  Moniteur  des  Intirgts  Matiriels,  July  3,  1908,  2183. 


320          HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

from  947,366,000  pesetas  in  1906  to  983,784,000  pesetas  in 
1907,  while  in  the  provinces  there  was  an  increase  from  435,- 
903,000  to  441,895,000  pesetas.  The  profits  of  the  bank  for 
the  year  were  58,260,237  pesetas  ($11,250,000),  of  which 
about  21,000,000  pesetas  was  derived  from  operations  with 
the  government  or  was  in  government  obligations.  Cost  of 
administration  was  17,369,169  and  dividends  were  dis- 
tributed to  the  amount  of  30,750,000  pesetas.1 

The  Bank  of  Portugal. 

Portugal  has  a  single  bank  of  issue,  whose  monopoly  in 
this  respect  dates  only  from  1888,  but  whose  origin  goes 
back  to  the  Bank  of  L,isbon  in  1821.  This  institution  was 
authorized  by  a  decree  of  November  19,  1846,  to  unite  with 
the  National  Surety  Company  (Companhia  Confianca  Nad- 
onal}  to  form  the  Bank  of  Portugal.2  The  last  extension  of 
the  charter  continued  the  bank  for  forty  years,  from  1888  to 
1928,  and  conferred  upon  it  the  monopoly  of  the  issue  of  legal- 
tender  notes  in  the  realm  of  Portugal  and  the  neighboring 
islands.  Seven  other  banks, — five  at  Oporto,  one  at  Braga, 
and  one  at  Guimaraes, — had  the  power  to  issue  notes  for 
circulation  within  their  respective  districts,  which  were  not 
received  by  public  depositaries.  An  arrangement  of  July  8, 
1891,  authorized  the  Bank  of  Portugal  to  unify  the  circula- 
tion and  substitute  its  own  notes  for  those  of  the  other 
banks.  The  bank  is  managed  by  a  governor  appointed  by 
the  Treasury  for  three  years  and  a  board  of  ten  directors 
chosen  by  the  shareholders. 

The  Bank  of  Portugal  has  been  from  the  beginning  little 
more  than  a  gigantic  paper-money  machine  for  meeting  the 
necessities  of  the  state.  This  was  the  case  with  the  Bank  of 
Lisbon,  which  issued  20,000,000  milreis  ($21,600,000)  to 
take  up  the  government  notes.  The  capital  of  the  bank  is 
13,500,000  milreis  ($14,500,000).  The  statutes  originally 
imposed  careful  restrictions  on  the  circulation,  but  these  re- 

1  ttconomiste  Europeen,  March  20,  1908,  XXXIII.,  379. 

2  Raffalovich,  in  itconomiste  Europeen,  March  13,  1908,  XXXIII. £ 
329- 


THE  BANKS  OF   SOUTHERN  EUROPE.  $21 

strictions  have  been  suspended  in  order  to  permit  large  loans 
to  the  government,  which  have  tended  to  drag  the  circulation 
of  the  bank  into  the  same  mire  of  depreciation  as  that  of  the 
Bank  of  Spain  in  the  last  century.  Article  15  of  the  orig- 
inal law  prescribed  that  the  circulation  should  always  be 
covered  by  a  metallic  reserve  and  negotiable  paper  maturing 
in  not  more  than  three  months  and  that  the  metallic  reserve 
should  be  in  gold  and  should  equal  one-third  the  aggregate 
of  the  circulation  and  other  demand  liabilities.  Article  16 
fixed  the  power  of  note  issue  at  double  the  capital  of  the 
bank  and  Article  37  limited  to  2,000,000  milreis  the  advances 
to  the  state.1  Both  the  latter  limitations  have  been  disre- 
garded and  the  circulation  is  now  more  than  five  times  the 
capital  and  advances  to  the  government  are  many  times  the 
amount  fixed  by  the  law.  The  amount  of  such  advances 
and  loans  stood  at  53,092,000  milreis  in  1905  and  increased 
to  54,290,000  milreis  ($58,633,000)  in  1907. 

A  share  of  net  earnings  goes  to  the  state.  The  share- 
holders receive  seven  per  cent.,  after  certain  reserves  are  set 
aside,  but  above  seven  per  cent,  there  is  an  equal  division 
with  the  government.  The  profits  on  loans  between  five 
and  six  per  cent,  are  divided,  but  above  six  per  cent,  go 
entirely  to  the  state.3  The  net  earnings  of  1907  were  1,739,- 
ooo  milreis  ($1,878,000),  which  permitted  a  dividend  of  nine 
and  a  half  per  cent. 

The  cash  resources  of  the  bank  and  its  readily  convertible 
obligations  have  tended  to  decrease  in  recent  years.  The 
demand  liabilities  at  the  close  of  1907  were  70,967,000  milreis 
on  account  of  circulation  and  1,601,000  milreis  on  account  of 
deposits.  Against  them  was  held  5,079,000  milreis  in  gold, 
4,822,000  milreis  in  silver  and  minor  coins,  and  18,590,000 
milreis  in  commercial  discounts.  The  remainder  of  the 
assets  were  made  up  of  government  obligations,  gold  cover- 
ing the  demand  liabilities  in  the  proportion  of  only  seven 
per  cent.3 

1  L£vy,  208. 

*  fcconomiste  Europien ,  March  13,  1908,  XXXIII.,  329. 

8 /<&*/.,  March  6,  1908,  XXXIII.,  316. 


322         ifiSTORY  OF  MODERN  BANKS  Of  ISSUE. 
The  National  Bank  of  Roumania. 

The  National  Bank  of  Roumania  was  founded  in  1880, 
with  special  privileges  at  first  for  twenty  years,  which  were 
soon  extended  to  December  31,  1912.  The  capital  is  30,- 
000,000  lei  ($6,000,000)  of  which  12,000,000  lei  have  been 
paid  in.  A  third  of  the  capital  was  furnished  by  the  govern- 
ment and  the  other  two-thirds  by  individuals,  but  the  gov- 
ernment in  1900  sold  its  shares  at  a  large  advance.  A  metallic 
reserve  of  at  least  one-third  of  the  note  issues  is  required  and 
no  bill  can  be  issued  below  twenty  lei  ($4).  The  entire 
circulation  must  be  covered  by  securities  which  are  readily 
negotiable,  but  thirty  per  cent,  of  the  metallic  reserve  may 
be  represented  by  foreign  bills  of  exchange. 1 

The  government  of  Roumania  issued  paper  money  soon 
after  its  establishment  in  1878,  guaranteed  by  the  public 
domains,  to  the  amount  of  26,200,000  lei,  and  the  National 
Bank  was  charged  in  1886  with  the  withdrawal  of  this  paper 
and  the  substitution  of  its  own  notes.  The  amount  of  this 
special  issue  was  gradually  retired  and  the  bank  was  reim- 
bursed by  the  government.  Financial  difficulties  again  arose 
in  1901,  however,  from  which  the  bank  aided  in  extricating 
the  state,  in  return  for  an  extension  of  its  charter  to  1920.  A 
further  extension  to  1930  was  purchased  by  an  advance  of 
15,000,000  lei,  which  the  state  is  required  to  reimburse  in 
part  from  its  share  in  the  profits  of  the  bank.  The  share- 
holders are  entitled  to  a  dividend  of  six  per  cent,  before  the 
state  steps  in  and  takes  twenty  per  cent,  of  what  remains, 
but  after  1913  the  state  will  take  thirty  per  cent.3 

At  the  time  of  the  creation  of  the  bank  in  1880,  it  was  not 
known  whether  the  monetary  standard  would  be  established 
ultimately  on  a  silver  or  gold  basis,  but  the  bank  gained 
strength  so  rapidly  that  it  readily  accepted  in  1892  an  ar- 
rangement with  the  government  by  which  the  reserve  was 


225.  The  gold  standard  was  adopted  in  Roumania  by  the 
law  of  March  2,  1890.  The  unit  in  the  three  Slavic  countries  is  the 
equivalent  of  the  French  franc  ($0.193). 

2  Economiste  EuropUn,  March  13,  1908   XXXIII.,  329. 


Of   SOUTHERN  EUROPE. 

to  be  kept  thereafter  in  gold  coin  or  in  bills  on  L,ondon  and 
Berlin.1  The  circulation  on  December  31,  1882,  was  96,- 
968,310  lei,  with  a  reserve  of  23,838,000  lei.  This  reserve 
stood  on  December  31,  1892,  at  53,160,703  lei  in  gold  and 
13,954,389  lei  in  foreign  bills.  The  circulation  at  the  close 
of  1906  had  risen  to  291,685,330  lei  and  the  metallic  reserve  to 
83,575,336  lei.2  The  reaction  of  the  crisis  of  1907  in  America 
forced  circulation  up  to  3 1 9 , 742 , 490  lei .  It  became  necessary 
to  raise  the  rate  of  discount  by  rapid  stages  to  six,  seven, 
and  finally  to  eight  per  cent.,  but  the  reserve  was  kept  intact 
at  more  than  100,000,000  lei,  and  a  sum  of  more  than  37,000,- 
ooo  lei  was  put  at  the  command  of  commerce.2 

The  National  Bank  of  Bulgaria. 

The  bank-note  circulation  of  Bulgaria  is  issued  by  the 
National  Bank,  which  was  founded  on  February  8,  1885,  by 
the  government,  with  a  capital  of  10,000,000  levs  ($2,000,- 
ooo)  in  gold.  The  bank  has  the  exclusive  privilege  of 
issuing  notes,  and  they  are  received  in  public  depositaries 
and  in  all  other  offices  of  the  government.  It  is  required 
to  hold  a  cash  reserve  in  gold  equal  to  one-third  the  value 
of  the  notes  in  circulation  and  to  redeem  the  notes  on  demand 
at  the  central  office  or  at  any  of  the  branches.  The  governor 
of  the  bank  is  named  by  the  Prince  upon  the  nomination  of 
the  minister  of  finance  and  four  administrators  are  appointed 
in  the  same  way.  The  government  is  represented  by  two 
delegates,  one  a  counsellor  of  the  court  of  accounts  and  the 
other  a  member  of  the  ministry  of  finance,  who  exercise 
official  supervision  over  the  operations  of  the  bank. 

Economic  conditions  in  Bulgaria  suffered  severely  from 
1897  to  1900  by  reason  of  a  succession  of  bad  crops.  The 
scanty  stock  of  gold  in  the  country  was  so  far  depleted  that 
the  premium  on  exchange  rose  to  seven  and  a  half  and  briefly 

1  Vide  article  on  "The  Circulation  in  Roumania,"  by  I^ascar  I/. 
Catargi,  quoted  in  Economiste  Europ&en,  September  3oth  and  October 
7,  1904,  XXVI.,  420  and  452. 

2  Aconomiste  Europten,  March  8,  1907,  XXXI.,  316. 

3  Moniteur  des  Intir$ts  Materiels,  May  3,  1908,  1457. 


324         HISTORY  OF  MODERN  BAKKS  OF  ISSUE. 

even  to  eleven  and  a  half  per  cent.,  and  the  government  by 
a  law  of  November  13,  1899,  authorized  the  redemption  of 
bank-notes  in  silver.  In  its  annual  report  for  1901  the  bank 
noted  the  fact  that  the  premium  on  exchange  had  mounted 
to  fourteen  per  cent,  and  laid  its  finger  on  the  fatal  defect  of 
a  state-owned  bank, — that  its  credit  was  linked  inseparably 
with  the  augmenting  pecuniary  needs  of  the  government.1 
Some  improvement  took  place  after  the  government  loan  of 
1902,  and  exceptionally  large  crops  in  1904  forced  the  pre- 
mium on  exchange  for  a  moment  to  the  negligible  level  of 
half  of  one  per  cent  *  ;  but  it  was  not  until  1906  that  the  pre- 
mium was  entirely  suppressed  and  the  exchange  of  notes  for 
gold  was  resumed.  The  bank,  under  these  conditions,  de- 
cided to  limit  the  denominations  of  the  silver  notes  which  it 
had  issued  during  the  period  of  suspension  to  five  and  ten 
levs  ($i  and  $2)." 

The  result  of  the  change  in  conditions  was  a  rapid  influx 
of  gold  into  the  bank.  There  was  a  gain  of  3,600,000  levs 
during  1904,  carrying  total  holdings  at  the  end  of  the  year 
to  9,272,724  levs;  by  the  close  of  1905  there  was  a  further 
advance  to  20,600,220  levs  and  for  1906  to  27,699,000  levs 
($5,350,000),  while  silver  remained  substantially  stationary 
at  10,688,000  levs  ($2,065,000).  The  circulation  of  the  bank, 
which  was  only  1,900,000  levs  ($367,000)  at  the  close  of 
1890,  was  2 1, 700,000  in  1900  ;  32,900,000^11903;  37,193,000 
in  1905  ;  44, 622,000  in  1906  ;  and  50,000,000  levs  ($9,650,000) 
in  June,  1908. 

The  National  Bank  of  Servia. 

The  bank-note  circulation  of  Servia  is  issued  by  the  Na- 
tional Bank  of  Servia,  which  was  established  by  the  law  of 
January  6,  1883,  subsequently  modified  by  the  law  of  Sep- 
tember 23,  1885.  The  capital  of  the  bank  is  20,000,000  dinars 
($4,000,000),  of  which,  however,  only  half  has  been  paid  up. 

1  Th£ry,  in  Economist*  Europten,  October  21,  1904,  XXVI.,  521. 
*  Economiste  Europten,  May  19,  1905,  XXVII.,  633. 
3  Ibid.,  May  31,  1907,  XXXL,  697. 


THE  BANKS  OF   SOUTHERN  EUROPE.  325 

The  privilege  of  the  bank,  which  was  originally  granted  for 
twenty-five  years,  includes  the  monopoly  of  note  issues.  The 
notes  of  ten  dinars  ($2)  are  redeemable  in  silver  and  those 
of  larger  denominations  in  gold.  The  bank  is  authorized, 
however,  to  redeem  in  silver  at  its  market  value  in  a  pro- 
portion fixed  by  the  minister  of  finance  upon  the  special 
petition  of  the  bank.  Silver  may  also  be  substituted  for 
gold  to  the  amount  of  not  more  than  twenty-five  per  cent,  of 
the  cash  reserve  and  the  bank  is  not  permitted  to  increase 
its  note  issues  above  two  and  a  half  times  its  reserve. 

The  provision  that  the  notes  may  be  redeemable  in  part 
in  silver  led  to  a  degree  of  distrust  of  the  note  issues  some- 
what similar  to  that  which  existed  in  1893  in  the  United 
States  regarding  the  notes  issued  under  the  Sherman  law. 
This  distrust  was  not  allayed  when  in  March,  1898,  the  gov- 
ernment made  an  arrangement  with  the  bank  for  a  new  issue 
of  10,000,000  dinars  in  silver  notes  to  meet  the  floating  debt. 
It  was  provided,  however,  that  the  amount  of  silver  notes 
put  in  circulation  should  not  be  greater  at  any  time  than 
32,000,000  dinars  and  that  as  the  loan  to  the  government 
was  reimbursed,  within  the  ensuing  ten  years,  the  silver 
circulation  should  be  reduced  until  it  should  not  exceed  25,  - 
000,000  dinars.1  Improvement  in  the  monetary  situation 
gradually  set  in,  however,  and  persisted,  in  spite  of  the  polit- 
ical disturbances  of  1903.  Only  about  a  year  after  the  violent 
change  of  dynasty  the  minister  of  finance  reported  that  the 
premium  on  gold  had  fallen  to  one-fifth  of  one  per  cent.,  and 
that  importation  of  the  yellow  metal  was  under  consideration.2 
The  next  year  (1905)  found  the  bank  able  to  reduce  the  dis- 
count rate,  which  had  been  seven  and  a  half  per  cent,  where 
the  loan  was  in  gold,  to  the  uniform  basis  of  six  per  cent,  for 
both  gold  and  silver  loans.8 

The  affairs  of  the  Bank  of  Servia  have  not  grown  so 
rapidly  as  those  of  the  other  Balkan  states,  but  circulation 
at  the  close  of  1907  was  37,362,927  dinars  ($7,225,000)  and 

1  £conomiste  Europten,  April  22,  1898,  XIII.,  509. 

2  Ibid.,  September  23,  1904,  XXVI.,  398. 

3  Ibid.,  May  26,  1906,  XXIX.,  668. 


326          HISTORY   OF  MODERN  BANKS  OF  ISSUE. 

metallic  resources  consisted  of  14,105,842  dinars  ($2,715,000) 
in  gold  and  7,434,967  dinars  in  silver,  exclusive  of  funds 
abroad  to  the  amount  of  3,439,753  dinars  ($645,000).  While 
the  amount  had  not  materially  increased  over  the  close  of 
1905,  the  change  in  the  ratio  had  been  in  favor  of  gold,  the 
gold  holdings  in  1905  having  been  12,421,106  dinars  and 
silver  8,670,926.  Discounts  on  December  3ist  were  5,521,560 
dinars  in  1905  and  6,958,242  dinars  in  1907.  Current  ac- 
counts at  the  close  of  1907  were  2,046,226  dinars.  The  net 
profits  of  the  year  were  788,746  dinars  ($153,000). * 

The  Banks  of  Greece. 

Greece  had  until  recently  three  banks  of  issue, — the  Na- 
tional Bank,  founded  in  1842  ;  the  Ionian  Bank,  founded  in 
1839  ;  and  the  Epiro-Thessalian  Bank.  The  capital  of  the  Na- 
tional Bank  is  20,000,000  drachmas.  The  Ionian  Bank  has 
its  head  office  in  London  and  its  paid-up  capital  is  ,£315,507, 
or  7,887,687  drachmas.2  All  three  banks  have  been  dragged 
into  the  channel  of  forced  legal  tender  and  depreciated  money 
by  the  enormous  debts  of  the  government  and  the  steadily 
growing  embarrassments  of  the  public  Treasury.  A  law  of 
June  20,  1877,  gave  forced  legal  tender  quality  for  the  first 
time  in  recent  years  to  the  notes  of  the  National  Bank  to  a 
limit  of  47,000,000  drachmas  ($9,071,000)  and  to  those  of  the 
Ionian  Bank  to  a  limit  of  12,000,000  drachmas  ($2,316,000). 
The  money  was  restored  to  par  in  1884  at  a  heavy  expense 
to  the  Treasury,  but  the  suspension  of  specie  payments  was 
thought  necessary  again"  in  October,  1885,  and  authority  to 
issue  inconvertible  notes  was  extended  to  the  Epiro-Thes- 
salian Bank  as  well  as  to  the  other  two  banks.  The  Na- 
tional Bank  was  authorized  to  issue  notes  of  which  one-third 
should  be  covered  by  coin  and  bullion,  one- third  by  commer- 


l£conomiste  Europeen,  July  10,  1908,  XXXIV.,  60. 

2  The  coinage  systems  of  Greece,  Roumania,  Bulgaria,  and  Servia 
are  each  based  upon  the  French  decimal  system  and  their  monetary 
unit  in  gold,  though  having  different  names,  is  equivalent  to  the 
franc,  which  is  valued  by  the  United  States  Mint  at  nineteen  and 
three-tenths  cents(|o.i93.) 


THE  BANKS  OF    SOUTHERN  EUROPE.  327 

cial  paper,  and  one-third  by  securities.  The  government 
borrowed  from  the  bank  14,000,000  drachmas  in  gold  and 
required  it  to  hold  notes  subject  to  its  orders  to  the  amount 
of  70,000,000  drachmas.  The  bank  was  given  in  return  for 
these  advances  the  right  to  circulate  60,000,000  drachmas 
on  its  own  account  in  inconvertible  paper.  The  Ionian 
Bank  was  authorized  to  maintain  a  circulation  of  7,000,000 
drachmas,  of  which  2,000,000  should  be  on  account  of  the 
government,  and  the  Epiro-Thessalian  Bank  was  given  a 
maximum  circulation  of  5,000,000  drachms,  of  which  800,- 
ooo  should  be  on  government  account.  The  National  Bank 
was  also  authorized  to  circulate  7,000,000  drachmas  in  small 
notes,  and  each  of  the  other  banks  was  authorized  to  issue 
3,500,000  drachmas  in  such  notes.  The  metallic  reserve  of 
the  National  Bank  has  been  reduced  below  2,000,000  drach- 
mas ($400,000)  and  while  gold  sometimes  reaches  the  coun- 
try after  the  sale  of  the  crops  it  quickly  flies  abroad  again  or 
disappears  into  private  hoards.  The  price  of  gold  in  paper 
was  122  in  1889  and  1890,  140  in  1892,  180  in  1893,  an(^  2O° 
in  1894.' 

The  population  of  Greece  is  about  2,300,000,  and  the  an- 
nual budget  for  carrying  on  the  government  averages  about 
100,000,000  drachmas  ($20,000,000),  of  which  35,000,000 
drachmas  is  on  account  of  interest  on  the  debt.  This  in- 
terest has  not  been  paid  for  several  years  in  gold,  as  required 
by  the  contract,  but  desultory  efforts  have  been  made  to  per- 
suade the  holders  of  the  securities  to  accept  new  securities  in 
payment  of  interest  or  to  permit  a  complete  readjustment  of 
Greek  finances.  The  British  holders  of  Greek  securities 
persuaded  the  London  Foreign  Office  in  1892  to  send  Major 
Law  to  Athens  to  study  the  actual  condition  of  affairs  and  to 
determine  whether  the  government  would  be  able  to  meet  its 
obligations.  Major  L,aw  made  a  report  to  the  British  minis- 
ter at  Athens  under  date  of  March  10,  1893,  recommending 
various  reforms  in  the  financial  system.  He  showed  that  the 
aggregate  public  debt  on  January  i,  1893,  was  about  750,- 

1  Raffalovich,  Le  Marcht  Financier  en  1893-4,  231.  J 


328          HISTORY   OF  MODERN  BANKS  OF  ISSUE. 

000,000  drachmas  ($150,000,000  or  about  $60  per  head). 
Greece  imports  more  than  she  exports  and  the  accumulated 
deficits  in  the  annual  budgets  since  1877,  due  to  the  premium 
on  gold  and  the  inefficient  methods  of  collecting  the  rev- 
enues, have  been  674,000,000  drachmas. 

Major  Law's  recommendations  were  not  adopted  and  no 
definite  plan  was  at  once  perfected  for  the  restoration  of 
order  to  Greek  finance.  The  King,  in  his  speech  from  the 
throne  on  November  8,  1893,  afforded  striking  evidence  of 
the  depreciation  of  the  bank-notes  and  the  evils  which  had 
come  in  its  train.  It  was  announced  that  all  the  subsidiary 
coins,  even  to  those  of  bronze,  had  disappeared  and  the  gov- 
ernment recommended  the  coinage  at  Paris  of  nickel  pieces 
of  five,  ten,  and  twenty  centimes  to  supply  the  people  with 
small  change.  A  law  was  approved  December  i,  1893,'  pro- 
viding for  the  payment  of  50  per  cent,  of  the  interest  then 
overdue  on  the  public  debt  in  bank-bills,  for  future  payments 
in  the  proportion  of  30  per  cent,  in  gold,  and  for  covering 
directly  into  the  Treasury  certain  funds  which  had  been 
pledged  as  the  guarantee  of  particular  loans.  This  legisla- 
tion was  avowedly  provisional,  and  the  government  was 
authorized  by  the  law  to  enter  into  negotiations  with  the 
foreign  bondholders  with  a  view  to  a  definite  readjustment. 
Several  conferences  were  held  at  Athens  and  Paris,  in  1894 
and  1895,  but  they  proved  abortive. 

It  was  not  until  after  the  unfortunate  war  with  Turkey  in 
1897,  over  tne  control  of  Crete,  that  a  definite  adjustment 
was  reached  by  Greece  with  the  holders  of  her  obligations. 
The  great  powers  then  intervened  to  save  the  country  from 
political  and  financial  ruin,  and  the  Greek  government, 
yielding  to  the  inevitable,  declared  that  it  accepted  the  medi- 
ation proposed,  surrendering  to  the  powers  the  protection  of 
its  interests  and  adhering  without  reserve  to  their  counsel.3 
Out  of  this  situation  grew  the  International  Financial  Com- 
mission, representing  England,  France,  Russia,  Germany, 

1  The  Greeks  still  adhere  to  the  Julian  calendar.     The  actual  date  by 
the  Gregorian  calendar,  in  use  in  Western  Europe,  was  December  I3th. 
*  Thery,  La  Grece  Actuelle,  21. 


THE  BANKS  OF   SOUTHERN  EUROPE.  329 

Italy,  and  Austria-Hungary,  which  took  definite  charge  of 
Greek  finances.  Delegates  of  these  powers  met  at  Athens 
on  October  27,  1897,  under  the  presidency  of  M.  Streit,  who 
relinquished  temporarily  the  post  of  governor  of  the  National 
Bank  of  Greece  to  accept  that  of  minister  of  finance.  Under 
their  agreement,  accepted  by  the  Greek  government,  March 
7,  1898,  arrangements  were  made  for  raising  the  94,300,000 
francs  required  to  be  paid  as  a  war  indemnity  to  Turkey, 
and  for  the  future  division  of  the  public  revenue  between 
the  bondholders  and  the  state.  The  three  powers  most  in- 
terested— England,  France,  and  Russia — lent  the  aid  of 
their  joint  guarantee  to  a  loan  of  170,000,000  francs  ($32,- 
710,000),  which  it  thus  became  possible  to  sell  at  100^2, 
although  bearing  the  low  rate  of  two  and  one-half  per  cent.1 
The  new  adjustment  involved  an  heroic  reduction  of  in- 
terest on  old  .loans,  but  was  rendered  necessary  by  the 
manner  in  which  the  resources  of  the  country  had  been  dis- 
sipated between  1880  and  the  collapse  of  1893.  A  careful 
estimate  put  the  amount  which  had  been  realized  from  570,- 
000,000  drachmas  in  loans  at  only  413,333,500  drachmas, 
upon  which  the  annual  charge  for  interest  and  sinking  funds 
was  27,789,900  drachmas.2  Of  the  75,000,000  drachmas 
raised  by  the  new  loan  in  addition  to  the  amount  devoted  to 
the  indemnity  to  Turkey,  30,000,000  was  set  aside  to  meet 
the  deficit  in  the  budget  for  1897,  25,000,000  to  pay  the 
floating  debt,  and  20,000,000  to  meet  expected  deficits  from 
1898  to  1902."  Interest  on  the  loan  of  1887  was  reduced  to 
forty -three  per  cent,  of  the  old  rate  and  on  other  recent 
loans  to  thirty -two  per  cent.,  subject  to  some  increase  in 
case  the  revenues  should  permit.4 

1  This  high  price  was  partly  due  to  the  surplus  of  capital  then 
seeking  investment.     At  Paris  the  amount  offered  was  41,500,000 
francs.     Subscriptions  were  received  from  1387  persons  for  987,809,- 
475  francs  and  actual  deposits  at  the  Bank  of  France  on  account  of 
the   instalments   were    196,579,000    francs. — Economists  Europeen^ 
May  13,  1898,  XIII.,  587. 

2  The*ry,  La  Grece  Aduelle,  9. 

3Raffalovich,  Le  Marchk  Financier  en  1807-08,  612. 
4Typaldo  Bassia,  in  Dictionnaire  du  Commerce,  II.,  370. 


330          HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

Beneficial  effects  were  felt  at  once  upon  the  economic  con- 
dition of  Greece  from  the  firm  control  of  the  International 
Commission,  but  they  only  began  to  be  marked  after  it  had 
been  several  years  in  operation.  The  average  rate  of  ex- 
change, which  was  1.68  in  1897,  was  still  at  1.63  in  1902, 
but  fell  to  1.56  in  1903  ;  1.38  in  1904  ;  1.23  in  1905  ;  i.io  in 
1906;  and  1.087  *n  I9°7-  These  changes  occurred  largely 
as  the  result  of  confidence  in  the  new  regime  rather  than 
because  of  an  obviously  favorable  balance  of  payments.  In 
1893  foreign  capital  was  rapidly  withdrawn  from  Greece  by 
the  banks,  but  after  1898  it  began  to  return,  with  a  resulting 
development  of  railway  and  industrial  enterprises  and  ex- 
pansion of  the  volume  of  business  of  the  banks.  This  is 
indicated  by  the  increase  of  drafts  to  order,  which  were 
chiefly  foreign  bills,  issued  by  the  National  Bank,  from  116,- 
984,000  drachmas  in  1896  to  489,284,000  in  1904,  and  by  the 
increase  in  exchange  operations  at  the  Bank  of  Athens  from 
71,728,000  drachmas  to  324,214,000  drachmas.  The  increase 
in  deposits  in  the  two  institutions  was  from  45,854,000  to 
130,464,000  drachmas  ($25,i8o,ooo).1  Equally  notable  was 
the  influx  of  foreign  capital  for  railway  and  industrial  en- 
terprises to  the  amount  of  35,000,000  drachmas  and  the 
repatriation  of  the  national  securities  shown  by  the  increase 
of  the  amount  of  coupons  paid  in  Greece  from  459,843 
drachmas  in  1899  to  789,300  drachmas  in  1905,  indicating 
holdings  in  Greece  on  the  latter  date  of  the  value  of  21,000,- 
ooo  drachmas.2  From  1896  to  1904  the  market  value  of 
securities  quoted  on  the  Greek  exchanges,  not  including  the 
public  debt,  rose  from  156,361,000  drachmas  to  272,681,000 
drachmas.9 

Improvements  in  banking  conditions  accompanied  the 
growth  in  the  resources  of  the  country.  The  Kpiro- 


1  The"ry,  La  Grece  Aduelle,  169. 

9  jfrconomiste  Europeen,  May  n,  1906,  XXIX.,  584.  For  similar 
cases  of  the  repatriation  of  national  securities  under  improved 
economic  conditions,  vide  the  author's  Principles  of  Money  and 
Banking,  II.,  344-46. 

3The"ry,  La  Grece  Actuelle,  155- 


THE  BANKS  OF  SOUTHERN  EUROPE.  331 

Thessalian  Bank  was  absorbed  in  1899  by  the  National  Bank 
and  the  limit  of  circulation  of  the  latter  was  advanced  from 
60,000,000  to  66,000,000  drachmas.  In  the  same  year  the 
National  Bank  aided  in  the  foundation  of  the  Bank  of  Crete, 
with  a  capital  of  10,000,000  drachmas  and  the  exclusive 
privilege  for  thirty  years  of  note  issue  in  Crete,  to  the  amount 
of  its  capital  and  surplus.1  The  Bank  of  Athens,  founded 
in  1893,  with  a  capital  of  2,750,000  drachmas,  is  not  a  bank 
of  issue,  but  is  the  leading  joint-stock  bank  and  has  aided 
in  the  accumulation  of  a  gold  fund. 

The  gold  resources  of  the  National  Bank  held  abroad 
increased  from  37, 194,000  drachmas  at  the  close  of  1903  to 
47,778,000  drachmas  ($9,270,000)  at  the  close  of  1906.  The 
circulation  issued  directly  by  the  bank  was  well  within  the 
legal  limit,  at  54,450,866  drachmas,  at  the  close  of  1906,  but 
the  issues  on  account  of  the  government  made  the  total 
circulation  129,219,000  drachmas.2  The  government  issues, 
however,  were  in  process  of  steady  reduction,  having  fallen 
from  a  maximum  of  165,775,975  to  137,640,239  drachmas.* 
The  commercial  discounts  of  the  bank,  which  were  13,782,- 
ooo  drachmas  at  the  close  of  1896,  were  21,113,000  drachmas 
at  the  close  of  1906.  Private  deposits  increased  during  the 
same  period  from  40,260,000  to  119,208,000  drachmas.  Net 
profits  in  1906  were  3,974,064  drachmas,  from  which  a 
dividend  of  185  drachmas  per  share  was  distributed  on  the 
20,000  shares. 

The  Imperial  Ottoman  Bank. 

The  Imperial  Ottoman  Bank  at  Constantinople  received 
the  exclusive  privilege  of  note  issue  in  Turkey  when  it  was 
founded  in  1863.  The  capital  was  furnished  by  British  and 
French  capitalists  and  was  originally  ,£2,700,000.  This  was 
increased  in  1865  to  ,£4,050,000  and  in  August,  1874,  by  the 
absorption  of  the  Austro-Ottoman  Bank,  to  ^10,000,000,  of 


»Tli€ry,  La  Grtce  Aduelle,  151. 

*  jfcconomiste  JEuropeen,]une  7, 1907,  XXXI.,  732, 

3 Ibid.,  August  23,  1907,  XXXII.,  229, 


332          HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

which  half  has  been  paid  up.1  The  first  charter  was  for 
thirty  years,  but  a  new  convention  of  February  17,  1875, 
prolonged  the  privileges  of  the  bank  for  an  additional  period 
of  twenty  years,  until  1913.  The  bank  is  required  to  main- 
tain a  cash  reserve  equal  to  one-third  of  its  circulating  notes 
and  these  notes  must  be  paid  in  coin  to  the  bearer  on  pres- 
entation. They  are  a  legal  tender  in  the  districts  in  which 
they  are  issued  and  where  the  branches  of  the  bank  are 
established.  The  government  is  pledged  by  the  charter  to 
issue  no  paper  money  during  the  continuance  of  the  bank 
and  to  authorize  the  creation  of  no  other  bank  or  establish- 
ment with  like  privileges. 

The  Turkish  people  have  not  yet  become  large  users  of 
bank-notes  and  are  easily  excited  to  distrust.  This  happened 
in  the  summer  of  1894,  when  some  forged  notes  were  found 
in  circulation  and  the  public  presented  £2 18,000  for  redemp- 
tion within  a  week.  The  circulation  at  the  head  office, 
which  was  ,£249,000  during  the  first  week  in  June,  fell  to 
,£66,000  during  the  first  week  of  July.  The  circulation  of 
the  bank  was  as  high  as  ,£990,000  in  1893,  but  was  only 
,£838,797  at  the  close  of  1894.  The  experience  of  this  run 
taught  the  management  the  importance  of  maintaining  a 
strong  coin  reserve  and  prepared  them  for  the  run  which  set 
in  during  the  political  disturbances  growing  out  of  the  Ar- 
menian massacres  in  the  autumn  of  1895.  The  government 
offered  the  bank  the  privilege  of  suspending  specie  payments 
for  thirty  days,  but  the  offer  was  declined  and  ^"1,300,000  in 
gold  was  obtained  early  in  November  from,  the  Bank  of 
France.  The  Imperial  government  were  so  pleased  with  the 
spirit  shown  by  the  bank  that  the  charter  was  extended  for 
twelve  years  until  1925. 2 

The  bank  has  been  extending  its  branches  of  late  years 
and  has  been  finding  them  more  profitable  as  their  convenience 
to  commerce  has  come  to  be  understood.  Branches  exist  at 
Smyrna,  Bagdad,  Aleppo,  Alexandria,  and  many  other  points, 
and  those  at  Smyrna  and  Bagdad  have  shown  a  material 

1  Revue  des  Banques,  May,  1895,  XIV.,  100. 

2  L,ondon  Bankers'  Magazine,  December,  1895,  XI,.,  726. 


THE  BANKS  OF    SOUTHERN  EUROPE.  333 

increase  of  business.  An  encouraging  feature  of  this  develop- 
ment has  been  the  fact  that  increased  advances  of  capital  by 
the  parent  bank  have  not  been  required  at  the  branches  in 
proportion  to  the  increasing  volume  of  business,  but  the 
capital  has  been  obtained  in  the  communities  themselves. 
The  growth  of  deposits  has  also  been  an  encouraging  feature  of 
the  bank,  the  amount  having  increased  from  about  ^£8, 000,000 
of  all  classes  at  the  close  of  1893  to  ;£II>74I>7°5  at  tne  close 
of  1907.  Cash  resources,  which  were  ,£2,963,419  at  the 
close  of  1899,  advanced  by  normal  steps  to  £4, 134,671  at  the 
close  of  1906.  In  the  crisis  of  1907,  the  bank  pursued  the 
same  prudent  course  as  in  1895,  so  that  its  cash  and  money 
at  call  at  the  end  of  the  year  stood  at  £5,023,400.  In  both 
Turkey  and  Egypt,  where  the  operations  of  the  bank  are 
conducted,  trade  conditions  were  much  disturbed  in  1907, 
and  some  of  the  foreign  banks  felt  the  consequences  seriously.1 
The  failure  of  the  crops  caused  such  suffering  in  Turkey  that 
the  government  reduced  import  duties  on  grain  and  made 
free  distributions  of  seeds.8  The  Imperial  Ottoman  Bank, 
however,  suffered  no  material  losses  and  was  able  to  dis- 
tribute an  annual  dividend  at  the  rate  of  nine  per  cent.,  which 
had  been  paid  for  1906,  after  successive  increases  from  six 
and  a  half  per  cent,  in  1902  and  1903  to  seven  per  cent,  in 
1904  and  eight  per  cent,  in  1905. 

The  circulation  of  the  bank  increased  gradually  until  the 
period  of  restriction  in  1907.  It  was  £832,320  at  the  close  of 
1899  and  advanced  to  £1, 177,794  for  1904  and  £"1,  181 ,760  for 
1906,  but  fell  to  £1,080,763  at  the  close  of  1907.  Total  assets 
at  the  close  of  1899  were  £15.998,079  ;  for  1904,  £"19,976,384  ; 
for  1906,  ,£22,397,344;  and  for  1907,  £"21,023,669." 


'London,  Bankers'  Magazine,  August,  1908,  LXXXVI.,  138. 
2  Economiste  Frangais^  July  18,  1908,  118. 

^Cf.   Moniteur  dcs  InterZts   Materiels,  July   5,    1907,  2235,    and 
London  Bankers'  Magazine -,  August,  1908,  LXXXVI.,  257. 


CHAPTER  XIII. 

THE  BANK  OF  THE  UNITED  STATES. 

Banks  of  Issue  before  the  Adoption  of  the  Constitution — Hamilton's 
Plan  for  the  First  Bank  of  the  United  States— The  Struggle  over 
a  New  Charter — The  Second  Bank  of  the  United  States  :  Its  Early 
Errors  and  its  Economic  Services — The  Bank  Dragged  into 
Politics  by  Jackson  and  Clay — Jackson's  Triumph  and  the  Re- 
moval of  the  Deposits — The  Independent  Treasury  System. 

THK  pathway  of  American  colonial  history  is  thickly 
strewn  with  the  failures  of  government  paper  money, 
which  might  have  afforded  an  instructive  lesson  to 
the  Continental  Congress  against  its  issues  of  Continental 
bills.  Several  cases  are  found  also  of  issues  on  private  bank 
ing  credit,  but  they  were  not  based  on  sound  banking  prin- 
ciples and  do  not  shine  greatly  by  comparison  with  the 
unrestrained  issues  resting  on  the  fiat  of  the  State.  The 
"  L,and  and  Manufactures  Bank,"  established  in  Massachu- 
setts in  1740,  did  not  pretend  to  do  better  than  issue  notes 
redeemable  in  goods,  but  they  stood  for  a  time  so  much 
higher  than  "  Massachusetts  bills  "  that,  in  spite  of  the  hos- 
tility of  Governor  Belcher,  merchants  specially  advertised 
goods  to  be  sold  for  "  Manufactory  bills."  '  In  Connecticut 
in  1733  the  New  L,ondon  Society  for  Trade  and  Commerce 
circulated  notes  which  were  current  until  prohibited  by  the 
authorities,  and  in  New  Hampshire  a  company  of  "  private 
gentlemen  ' '  attempted  to  meet  the  demand  for  a  circulating 
medium  by  an  issue  of  bills.  Most  of  these  schemes,  in- 
cluding that  of  the  specie  bank,  formed  to  counteract  the 

1  Weeden,  487. 

334 


THE  BAttK  OF   TilE    UNITED  STATES.  335 

I,and  and  Manufactures  Bank,  fell  under  the  prohibition  of 
the  Joint  Stock  Companies'  Act.  This  act  was  passed  in 
England  after  the  bursting  of  the  South  Sea  Bubble  in  1720 
and  forbade  the  formation  of  banking  companies  without  a 
special  charter,  but  it  was  not  until  1740  that  it  was  declared 
by  Parliament  to  extend  to  the  colonies. 

The  history  of  banks  of  issue  in  the  United  States  can 
hardly  be  said  to  have  begun,  however,  until  the  foundation 
of  the  Bank  of  Pennsylvania.  The  bank  originated  in  the 
plan  of  a  number  of  citizens  of  Philadelphia  to  supply  the 
army  with  rations,  and  their  first  bills,  issued  in  1780,  were 
nothing  more  than  interest-bearing  notes  payable  at  a  future 
time.  The  advances  in  Continental  money  made  by  the 
shareholders  were  secured  by  bills  of  exchange  for  ;£  150,000 
drawn  on  the  envoys  in  Europe,  but  not  intended  to  be 
negotiated.1  Approval  was  given  by  Congress  May  26, 
1781,  to  the  plan  of  Robert  Morris  for  the  Bank  of  North 
America,  with  a  capital  of  $400,000,  to  be  increased  if  desired. 
Morris  arranged  with  the  Bank  of  Pennsylvania  to  transfer 
the  foreign  bills  it  was  holding  to  the  new  bank  and  paid  in 
cash  its  claims  against  the  Federation.  The  charter  of 
the  Bank  of  North  America  was  not  actually  granted  until 
December  31,  1781,  and  business  was  begun  January  7,  1782. 
There  was  so  much  doubt  of  the  power  of  Congress  to 
charter  a  bank  that  a  charter  was  obtained  April  i,  1782, 
from  the  State  of  Pennsylvania,  under  which  the  bank  con- 
tinued to  operate  until  absorbed  into  the  national  banking 
system  in  1863.  The  bank  did  much  to  restore  order  to  the 
chaos  of  Federation  finances  and  loaned  Morris,  as  Superin- 
tendent of  Finance,  $1,249,975,  of  which  $996,581  was  repaid 
in  cash  and  the  remainder  by  surrendering  the  bank  stock 
owned  by  the  Federation.  The  government  had  originally 
paid  for  its  stock  in  silver  brought  from  France,  but  this 
silver  was  infinitely  more  productive  by  the  skilful  manage- 
ment of  the  bank  than  it  could  ever  have  been  if  covered 
into  the  public  treasury.  Livingston  wrote  to  Dana  Decem- 
ber 17,  1782  : 

1  Sumner,  Finances  of  the  .American  Revolution,  II.,  22. 


336          HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

Paper  is  entirely  out  of  circulation,  if  we  except  the  bank  paper, 
which,  being  payable  at  sight  in  specie,  is  equal  to  it  in  value.  So 
extensive  has  this  circulation  been  that  the  managers  not  long  since 
published  a  distribution  of  the  first  half-year's  dividend  at  four  and  a 
half  per  cent,  notwithstanding  a  variety  of  expenses  to  which  they 
had  been  put  in  the  first  organization  of  the  bank.1 

The  first  Bank  of  the  United  States  was  incorporated  by 
the  First  Congress  in  1791, 2  as  a  part  of  the  scheme  of  Alex- 
ander Hamilton  to  strengthen  the  new  Federal  government. 
Those  who  had  opposed  the  adoption  of  the  Constitution 
because  of  its  centralizing  tendencies,  and  some  of  those  who 
had  supported  it,  opposed  the  granting  of  the  bank  charter 
upon  the  ground  that  the  Constitution  contained  no  express 
grant  to  Congress  of  the  power  to  establish  a  corporation. 
Their  argument  was  that  the  case  fell  plainly  within  the 
rule  subsequently  embodied  in  the  tenth  amendment  to  the 
Constitution,  that  "  The  powers  not  delegated  to  the  United 
States  by  the  Constitution,  nor  prohibited  by  it  to  the  States, 
are  reserved  to  the  States  respectively  or  to  the  people." 
President  Washington  obtained  the  opinion  of  the  members 
of  the  cabinet  before  signing  the  bill.  The  opinions  of 
Jefferson  and  Edmund  Randolph  were  adverse  to  the  con- 
stitutionality of  the  measure  ;  but  Washington  followed  the 
advice  of  Hamilton,  his  brilliant  young  Secretary  of  the 
Treasury,  and  gave  the  bill  his  approval. 

The  capital  of  the  Bank  of  the  United  States  was  fixed  at 
$10,000,000,  divided  into  25,000  shares  of  $400  each.  The 
protection  of  small  investors  in  bank  stock  was  sought  by  a 
graduated  scale  of  voting  which  did  not  permit  more  than 
thirty  votes  to  any  shareholder.  Foreign  shareholders  were 
not  allowed  to  vote  by  proxy,  which  practically  prevented 
their  voting  at  all.  The  number  of  directors  was  fixed  at 
twenty-five,  who  must  be  citizens  of  the  United  States  and 
not  more  than  three-fourths  of  whom  were  eligible  for  re- 
election. The  bank  was  not  forbidden  to  loan  on  real 
estate  security,  but  could  not  become  an  owner  of  real  estate 


1  Wharton,  Diplomatic  Correspondence,  VI.,  146. 

2  Act  of  February  25,  1791. 


THE  BANK   OF   THE    UNITED   STATES.  337 

(beyond  what  was  needed  for  banking  houses)  unless  the 
property  came  into  its  hands  in  satisfaction  of  mortgages  or 
judgments.1  The  only  limitation  upon  note  issues  was  that 
which  limited  all  debts  other  than  deposits  to  the  amount  of 
the  capital  stock.  The  notes  were  receivable  for  dues  to  the 
government  so  long  as  they  were  redeemable  in  coin  on  de- 
mand. The  charter  was  granted  for  twenty  years,  with  the 
provision  that  Congress  should  not  charter  another  bank 
within  that  time.  This  was  far  from  implying  a  monopoly 
of  note  issues,  for  the  State  banks  were  in  no  way  disturbed 
in  their  privileges  and  methods  except  so  far  as  the  new 
institution  by  its  example  acted  as  a  regulator  of  the  currency. 
Its  large  capital  and  pre-eminent  position  operated,  and  were 
intended  to  operate,  to  give  it  such  a  commanding  position 
as  was  occupied  by  the  Bank  of  England  among  the  country 
banks  of  that  country. 

The  charter  provided  that  one-fifth  of  the  capital  should 
be  subscribed  by  the  government  of  the  United  States,  but  a 
loan  was  to  be  made  to  the  government  equal  to  the  amount 
subscribed,  to  be  repaid  in  ten  annual  instalments  of  $200,- 
ooo  each,  with  interest  at  six  per  cent.  No  other  loans  were 
to  be  made  to  the  government  exceeding  $100,000  without 
authority  of  law.  The  practical  effect  of  the  government 
holdings  of  stock  was  simply  to  give  the  bank  the  note  of 
the  government  for  its  final  payment,  *but  as  the  bank  was 
forbidden  to  deal  in  its  own  stock  the  process  of  issue  of  the 
government  stock  was  somewhat  complicated.  It  would 
have  been  useless  for  the  government  to  draw  money  from 
Europe  to  pay  into  the  treasury  of  the  bank,  to  be  immedi- 
ately drawn  out  again  and  remitted  to  Europe  for  charges 
there.  The  course  adopted  was  for  the  Treasurer  of  the 
United  States  to  draw  bills  of  exchange  on  the  American 
Commissioners  in  Amsterdam  for  the  amount  required  to 

1  It  is  significant  of  Hamilton's  growing  familiarity  with  finance  that 
he  did  not  revive  the  project  of  the  bank  of  issue  based  upon  landed 
security  which  had  attracted  him  a  few  years  before,  but  laid  down 
in  his  report  the  correct  theory  of  a  credit  currency  based  upon  quick 
assets.—  Works,  III. ,106-107. 


338         HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

pay  the  bank.  The  bills  were  purchased  by  the  bank  and 
warrants  issued  in  favor  of  the  Treasury  upon  the  bank, 
thereby  placing  the  amount  in  the  Treasury.  Other  war- 
rants were  then  issued  upon  the  Treasury  in  favor  of  the 
bank  for  the  amount  of  the  subscription  to  the  stock,  which 
the  bank  receipted  for  as  paid.  The  stock  having  been  thus 
paid  for  in  accordance  with  law,  the  bank  loaned  $2,000,- 
ooo  to  the  government  in  accordance  with  the  act  of  incor- 
poration by  handing  over  the  bills  of  exchange  originally 
drawn  by  the  Treasury  on  Amsterdam.1 

The  Bank  of  the  United  States  was  authorized  to  establish 
offices  of  discount  and  deposit  in  the  several  States  and 
$4,700,000  of  the  capital  was  reserved  for  the  central  bank 
at  Philadelphia.  The  remainder  was  divided  among  eight 
branches,  established  eventually  at  New  York,  Baltimore, 
Boston,  Washington,  Norfolk,  Charleston,  Savannah  and 
New  Orleans.  Private  subscriptions  were  required  to  be 
paid  one-fourth  in  gold  and  silver  and  three-fourths  in  six 
per  cent,  government  stocks  or  in  three  per  cent,  stocks.  The 
capital  was  over-subscribed  to  the  amount  of  four  thousand 
shares  within  two  hours  after  the  opening  of  the  books. 
Oliver  Wolcott,  who  afterwards  succeeded  Hamilton  as  Secre- 
tary of  the  Treasury,  was  offered  the  presidency,  but  de- 
clined, and  Thomas  Willing  of  Philadelphia  was  selected. 

The  bank  was  more  successful  in  its  commercial  dealings 
than  in  obtaining  prompt  payment  of  its  advances  to  the 
government.  No  regular  reports  were  made  to  the  Treasury 
Department,  but  the  report  communicated  to  Congress  by 
Secretary  Gallatin  for  January  24,  1811,  showed  resources 
of  $24,183,046,  of  which  the  leading  items  were  $14,578,294 
in  loans  and  discounts,  $2,750,000  in  United  State  six  per 
cent,  stock,  and  $5,009,567  in  specie.  The  leading  items  of 
liability  were  $10,000,000  on  account  of  capital,  $5,037,125 
in  circulating  notes,  $5,900,423  in  individual  deposits,  and 
$1,929,999  in  United  States  deposits.  The  average  annual 
dividends  paid  up  to  March,  1809,  were  over  eight  per  cent. 


1  Bolles,  II.,  129-30. 


THE  BANK  OF   THE    UNITED   STATES. 

The  bank  made  several  loans  to  the  government  in  antici- 
pation of  the  revenues  early  in  its  career.  They  were  not 
promptly  paid  and  the  debt  of  the  government  to  the  bank 
at  the  end  of  1792  was  $2,556,595,  which  increased  at  the 
end  of  1795  to  $6,200,000.  An  attempt  was  made  to  sell 
government  five  per  cent,  stock,  but  only  $i  20,000  was  realized 
and  it  became  necessary  for  the  government  to  part  with  one 
of  its  most  valuable  assets, — its  shares  in  the  bank.  The 
third  and  fourth  instalments  of  the  original  $2,000,000  loan 
to  the  government  were  not  paid  until  1797,  when  2160  shares 
of  the  government  stock  were  sold  at  $500  per  share  (a  pre- 
mium of  $100)  and  the  proceeds,  $1,080,000,  were  applied 
to  these  two  instalments  and  to  other  obligations  of  the  gov- 
ernment to  the  bank.  Six  hundred  and  twenty  more  shares 
were  sold  soon  afterwards  for  $304,260  and  in  1802  the  re- 
maining shares  were  sold  at  an  advance  of  forty-five  per 
cent,  and  the  government  ceased  to  be  a  stock-holder. 
Secretary  Gallatin  reported  in  1809  that  the  government 
made  a  profit  of  $671,860  on  the  sale  of  its  shares,  besides 
receiving  dividends  at  the  rate  of  about  eight  and  three- 
eighths  per  cent,  annually.  The  aggregate  payments  by  the 
government,  including  interest,  were  $2,636,427,  while  the 
proceeds  and  dividends  together  were  $3,773,580,  represent- 
ing a  profit  of  nearly  fifty-seven  per  cent,  on  the  original 
investment  for  the  eleven  years  during  which  the  government 
was  a  shareholder.1 

Opposition  to  the  Bank  of  the  United  States  did  not  die 
out  with  Washington's  administration  nor  with  its  large 
advances  to  the  government.  The  conception  of  the  func- 
tions of  a  bank  which  then  prevailed  is  indicated  by  Presi- 
dent Jefferson's  letter  of  July  12,  1803,  to  Gallatin,  in  which 
he  declared,  '  *  I  am  decidedly  in  favor  of  making  all  the  banks 
republican  by  sharing  deposits  among  them  in  proportion  to 
the  dispositions  they  show."  The  bank  had  a  steady  friend 
in  Gallatin,  however,  and  he  not  only  continued  to  avail 
himself  of  its  assistance  in  the  fiscal  operations  of  the 


1  Sen.  Ex.  Doc.  38,  526.  Cong.,  2d  Sess.,  34. 


340         HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

government,  but  induced  Jefferson  to  approve  a  bill  estab- 
lishing a  branch  at  New  Orleans. 

The  charter  of  the  bank  was  to  expire  in  1811  and  the 
shareholders  petitioned  in  1808  for  a  renewal.  The  proposal 
was  strongly  supported  by  Gallatin  in  a  report  of  March  9, 
1809,  reviewing  the  entire  history  of  the  bank.  He  recom- 
mended that  the  capital  be  increased  to  $30,000,000,  with  a 
view  to  lending  three-fifths  of  the  amount  to  the  government 
in  case  of  war,  and  that  the  States  be  allowed  to  subscribe 
$15,000,000.  The  advantage  derived  by  the  government 
from  the  existing  bank  he  classified  under  the  four  heads  of 
safe  keeping  of  the  public  monies,  transmission  of  public 
monies,  collection  of  revenue,  and  loans.1  Congress  was 
not  disposed  to  adopt  so  comprehensive  a  scheme  as  this, 
but  theoretical  opposition  to  the  bank  had  so  far  yielded  to 
practical  considerations  that  the  terms  of  a  contract  were 
arranged  for  a  new  charter,  which  received  the  approval  of 
the  House  on  April  21,  1810,  by  a  vote  of  75  to  35.  It  was 
the  fatal  incapacity  of  the  Eleventh  Congress  to  take  positive 
action  which  prevented  the  taking  up  of  the  bill  again,  and 
gave  the  State  bankers  time  to  organize  an  opposition  and 
instruct  their  senators  against  re-charter.2 

The  charter  was  opposed  at  the  next  session  not  only  by 
the  advocates  of  strict  construction  of  the  Constitution,  but 
by  party  factions  opposed  to  Gallatin  in  the  Cabinet  and  the 
Senate.  William  Duane  and  Michael  I^eib  had  attempted  to 
dictate  the  Federal  appointments  in  Philadelphia  and  upon 
Gallatin's  refusal  to  submit  became  his  bitter  enemies.  They 
were  supported  in  the  bank  contest  by  a  Maryland  clique 
headed  by  Robert  Smith,  the  Secretary  of  State,  and  Sena- 
tor Samuel  Smith,  his  brother.  The  fact  that  about  1800 
of  the  2500  shares  were  held  abroad  was  made  the  occasion 
of  bitter  attacks  upon  the  bank.  A  type  of  this  sort  of  op- 
position was  the  speech  of  Mr.  Desha  of  Kentucky,  in  the 
House  on  February  12,  1811,  in  which  he  declared  that  this 
accumulation  of  foreign  capital  was  one  of  the  engines  for 

1  Stevens,  261. 

2  Adams,  V.,  208. 


THE  BANK  OF   THE    UNITED   STATES.  341 

overturning  civil  liberty  and  that  he  had  no  doubt  George 
III.  was  a  principal  stock-holder  and  would  authorize  his 
agent  in  this  country  to  bid  millions  for  a  renewal  of  the 
charter.1  Gallatin  had  anticipated  this  ground  of  hostility 
in  his  report  to  Congress.  He  called  attention  to  the  fact 
that  the  foreign  shareholders  had  no  vote  and  that  if  the 
charter  was  not  renewed  the  principal  of  the  foreign  hold- 
ings would  have  to  be  remitted  abroad  in  liquidation  of  the 
affairs  of  the  bank. 

William  H.  Crawford  of  Georgia  was  the  champion  of 
Gallatin  and  the  bank  in  the  Senate  and  his  able  argument 
commended  him  to  the  administration  and  made  him  a  strong 
candidate  in  later  years  for  the  presidency.  Henry  Clay  held 
that  Congress  had  no  power  to  create  the  bank  or  to  continue 
it,  and  followed  the  leanings  of  Mr.  Desha  in  the  opinion 
that  in  case  of  war  with  England  "the  Bnglish  premier" 
would  exercise  control  over  the  institution.  The  House  on 
January  24,  1811,  postponed  indefinitely  the  bill  for  renew- 
ing the  charter  by  a  vote  of  65  to  64.  The  vote  in  the  Sen- 
ate on  February  2oth  was  17  to  17,  and  the  Vice- President, 
George  Clinton,  an  enemy  of  Gallatin,  gave  the  casting  vote 
against  the  bill.  "The  necessity  for  such  an  institution," 
says  Mr.  Henry  Adams,  ' {  was  merely  one  of  the  moment, 
but  in  the  period  of  national  history  between  1790  and  1860, 
the  year  1811  was  perhaps  the  only  moment  when  destruc- 
tion of  the  bank  threatened  national  ruin."2  \The  govern- 
ment was  compelled  to  rely  in  the  war  of  1812  on  the  State 
banks,  and  their  suspension  of  specie  payments  in  1814'  al- 
most paralyzed  the  operations  of  the  Treasury  A  It  became 
impossible  to  make  transfers  of  funds  from  one  part  of  the 
Union  to  another,  because  the  notes  of  the  banks  of  one  sec- 
tion did  not  pass  current  in  other  sections.  Gallatin  has  left 
on  record  the  opinion  that  the  suspension  of  specie  payments 
in  1814  "might  have  beeiL4»e«eii^d_aLJfliejtim^jwt^^ 
took  place/Ead  the  former  Bank  of  the  United  States  been 
still  in 'existence. ' '  /  He  believed  that  the  bank  would  have 

1  White,  265. 

a  History  of  the  United  States,  V.,  329. 


342          HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

aided  the  treasury  and  that  "  both  acting  in  concert  would 
certainly  have  been  able  at  least  to  retard  the  event  ;  and,  as 
the  treaty  of  peace  was  ratified  within  less  than  six  months 
after  the  suspension  took  place,  that  catastrophe  would  have 
been  altogether  avoided." 

The  necessity  for  means  of  carrying  on  the  war  with 
Great  Britain  led  to  a  great  variety  of  odd  proposals  in  Con- 
gress after  the  suspension  of  1814.  One  of  the  crudest  of 
these  was  a  plan  of  ex-President  Jefferson's,  communicated 
to  President  Madison,  to  issue  $20, 000,000  in  government 
promissory  notes  annually  as  long  as  might  be  necessary  and 
to  appeal  to  the  State  legislatures  to  relinquish  the  right  to 
establish  banks.  Dallas,  who  succeeded  Campbell  as  Secre- 
tary of  the  Treasury  on  October  6,  1814,  indicated  indirectly 
his  opinion  of  this  scheme  by  recommending  a  new  bank 
and  remarking  that  ' '  The  extremity  of  that  day  cannot  be 
anticipated  when  any  honest  and  enlightened  statesman  will 
again  venture  upon  the  desperate  expedient  of  a  tender 
law."  '  The  plan  of  Dallas,  as  set  forth  in  his  report  of 
October  iyth,  was  for  a  bank  with  a  capital  of  $50,000,000,  em- 
powered to  lend  $30,000,000  to  the  Treasury.  There  was  a 
provision  in  the  bill  reported,  authorizing  the  suspension  of 
specie  payments  at  the  discretion  of  the  President  of  the 
United  States,  and  it  was  fallen  upon  by  Daniel  Webster  in 
a  speech  of  great  power  and  eloquence.  He  urged  the  crea- 
tion of  a  bank  for  commercial  purposes  rather  than  one  in- 
volved at  the  outset  with  the  government.  The  result  of 
his  attack  was  the  defeat  of  the  bill  by  a  tie  vote,  which  was 
then  reconsidered  and  the  bill  sent  to  a  select  committee. 
Amendments  were  adopted  which  met  Mr.  Webster's  views, 
but  in  this  form  the  measure  did  not  meet  the  wants  of  the 
Treasury.  It  passed  the  House,  120  to  38,  and  the  Senate, 
20  to  14,  but  was  vetoed  by  the  President  on  January  30, 
1815.  Another  effort  was  made  to  pass  the  Dallas  bill,  but 
it  failed  in  the  House  on  February  iyth  by  a  majority  of  one 
vote. 


1  Adams,  VIII.,  245-49. 


THE  BANK  OF   THE    UNITED   STATES.  343 

The  evils  of  the  currency  had  not  been  remedied  when 
Congress  met  again  in  December, -xi^i^jind. Pr£sident_Madi— 
soiLSUggegted  a  national  bank-as_a^suitable  instrument  for__ 
promoting,  specie  payments.  Secretary  Dallas  submitted  a 
detailed  plan  for  the  bank,  which  was  adopted  by  Congress 
with  little  change.  The  capital  of  the  new  bank  was  fixed 
at  $35,000,000,  of  which  one-fifth  was  to  be  subscribed  by 
the  government  in  money  or  in  its  own  obligations.  The 
government  subscription  was  by  a  stock  note,  which  was  not 
fully  paid  up  in  cash  until  1831.  The  public  funds  were  to 
be  deposited  in  the  bank,  "  unless  the  Secretary  of  the  Treas- 
ury shall  at  any  time  otherwise  order  and  direct  ;  in  which 
case  the  Secretary  of  the  Treasury  shall  immediately  lay  be- 
fore Congress,  if  in  session,  and  if  not,  immediately  after 
the  commencement  of  the  next  session,  the  reasons  for  such 
order  or  direction. ' '  Twenty-five  directors  were  to  be  chosen, 
five  to  be  named  by  the  President,  and  the  notes  of  the  bank 
were  made  receivable  in  all  payments  to  the  United  States. 
The  bank  was  again  given  duration  for  twenty  years  and  no 
other  bank  was  to  be  established  within  this  time  by  Congress 
outside  the  District  of  Columbia.  This  privilege,  as  in  the 
case  of  the  first  bank,  carried  with  it  no  restrictions  upon  the 
State  banks  of  issue  except  such  as  the  new  bank  was  ex- 
pected to  exercise  by  its  moral  and  financial  influence  tow- 
ards the  restoration  of  specie  payments.  A  bonus  to  the 
government  was  required  of  $500,000  annually  for  three 
years  after  the  end  of  the  second  year. 

The  progress  of  public  opinion  in  favor  of  the  implied 
powers  of  the  Federal  government  under  the  Constitution  is 
indicated  by  the  attitude  of  Madison  and  the  democratic 
party  towards  the  incorporation  of  the  second  Bank  of  the 
United  States.  Madison  as  a  member  of  the  First  Congress 
had  opposed  the  incorporation  of  the  Bank  of  the  United 
States  upon  constitutional  grounds,  and  in  1799  had  alluded 
to  it  as  one  of  the  examples  of  the  usurping  tendencies  of 
the  Federal  government  ;J  but  as  President  in  1814  and  1815 


1  Von  Hoist,  I.,  388. 


344         HISTORY  OF  MODERN"  BANKS  OF  ISSUE. 

he  was  willing  to  treat  the  constitutional  issue  as  res  adjudi- 
cata.  More  surprising  is  the  fact  that  Calhoun,  in  later 
years  the  hair-splitting  logician  of  strict  construction  and 
the  champion  of  nullification,  was  found  foremost  among 
the  supporters  of  the  charter  of  the  second  bank.  He  re- 
ported the  bill  to  the  House  and  suggested  that  if  the  bank  by 
its  financial  policy  was  unable  to  compel  the  State  banks  to 
return  to  specie  payments,  Congress  might  resort  to  stronger 
measures,  which  were  within  their  power.  Both  Calhoun 
and  Webster  favored  the  refusal  by  the  government  of  the 
notes  of  suspended  banks  and  the  collection  of  all  govern- 
ment dues  in  specie.1  Webster  secured  an  amendment  to 
the  bank  bill,  requiring  the  payment  of  deposits  as  well  as 
notes  in  specie,  subject  to  a  forfeit  of  twelve  per  cent,  on  the 
amount  for  which  specie  payment  was  refused. 

The  constitutional  question  had  thus  been  decided  by  the 
legislative  branch  of  the  government  before  it  reached  the 
Supreme  Court  in  1819.  That  court,  in  the  celebrated  case  of 
McCulloch  vs.  Maryland,  in  which  the  decision  was  rendered 
by  Chief-Justice  Marshall,  decided  that  the  power  to  create 
a  national  bank,  to  assist  in  carrying  on  the  fiscal  opera- 
tions of  the  government,  was  within  the  implied  powers 
of  the  Constitution.  Equally  important  was  the  decision 
upon  the  direct  issue  raised  in  that  case,  whether  the  States 
could  constitutionally  levy  taxes  upon  the  circulating  notes 
or  the  property  of  a  national  bank.  Representative  Fiske 
of  New  York, .in  a  strong  speech  in  favor  of  the  renewal  of 
the  first  charter  in  1811,  declared  that  the  States,  in  order  to 
give  the  preference  to  their  own  paper,  might  exclude  that 
of  any  other  State  from  circulation  within  their  limits  by 
taxation.2  He  did  not  suggest  that  they  might  pursue  the 
same  policy  towards  the  notes  of  a  national  bank,  but  this 
position  was  taken  by  the  State  of  Maryland  towards  the 
notes  of  the  second  Bank  of  the  United  States,  and  the  case 
was  carried  to  the  Supreme  Court.  A  decision  in  favor  of 
the  right  of  the  States  to  have  taxed  the  circulating  notes  of 

1  White,  278. 

2  Bolles,  II.,  150. 


THE  BANK  OF   THE    UNITED   STATES.  345 

the  United  States  or  of  corporations  chartered  under  its  laws, 
would  have  precluded  forever  the  creation  of  a  national  cur- 
rency, issued  either  by  the  government  or  by  national  banks. 
Indeed,  if  the  Federal  government  had  not  the  power  to 
withdraw  its  creations  from  discriminating  legislation  by 
the  States,  Chief-Justice  Marshall  declared,  they  might  tax 
the  mail  or  the  mint,  the  papers  of  the  custom  house,  or  the 
forms  of  judicial  process.1 

The  question  of  the  existence  of  the  bank  in  the  face  of 
discriminating  State  taxation  was  not  an  academic  one  in 
1818  and  the  following  years,  but  one  which  was  severely 
practical.  The  efforts  of  the  bank  to  drive  the  State  notes 
from  circulation,  and  especially  its  later  contraction  of  dis- 
counts when  it  found  itself  on  the  verge  of  bankruptcy, 
caused  commercial  distress  and  made  the  bank  exceedingly 
unpopular.  North  Carolina  laid  a  tax  of  $5000  per  year  on 
the  branch  at  Fayetteville.  Kentucky,  Tennessee,  Ohio,  and 
Maryland  laid  taxes  on  circulation  or  on  the  branches  as 
such.  The  Maryland  act  required  the  purchase  of  stamped 
paper  for  the  printing  of  the  circulating  notes  or  the  annual 
payment  of  $15,000  by  the  branch  at  Baltimore.  The  branch 
continued  to  issue  notes  on  unstamped  paper  and  the  cashier, 
William  McCulloch,  was  sued  for  debt  and  gave  his  name  to 
one  of  the  most  celebrated  of  American  constitutional  cases.2 
Chief-Justice  Marshall,  in  rendering  his  decision,  admitted 
that  the  States  possessed  unimpaired  the  power  of  taxing  the 
people  and  property  of  the  State  and  that  it  might  tax  the 
real  property  of  the  bank  in  common  with  other  such  prop- 
erty within  the  State,  and  might  tax  the  interest  of  citizens 
of  Maryland  in  the  bank  ;  but  he  declared  that  the  Consti- 
tution of  the  United  States  placed  beyond  the  reach  of  State 
power  all  the  powers  conferred  on  the  government  of  the 
Union  and  all  the  means  given  for  the  purpose  of  carrying 
those  powers  into  execution.3 

1  4  Wheaton,  316. 

2  McMaster,  IV.,  497. 

5  Following  this  decision,  all  securities  of  the  United  States  have 
been  held  free  from  taxation  by  the  States  unless  with  the  consent  of 


346          HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

The  Bank  of  the  United  States  was  badly  managed  during 
the  first  years  of  its  existence  and  in  the  summer  of  1818 
was  upon  the  verge  of  insolvency.  The  bank  began  busi- 
ness January  7,  1817,  and  violated  its  charter  from  the  out- 
set. The  proportion  of  specie  required  to  be  paid  in  on  the 
second  and  third  instalments  was  not  paid  and  the  bank 
loaned  money  to  stockholders  on  the  pledge  of  their  stock 
and  personal  notes.  Trading  in  shares  before  they  were  paid 
for  pushed  up  the  quotations  and  the  bank  loaned  on  the  in- 
creased value  when  other  nominal  security  was  furnished  in 
the  form  of  mutual  indorsements.  The  Baltimore  branch 
was  practically  wrecked  by  its  managers,  with  a  loss  of 
$1,671,221.  The  policy  adopted  for  restoring  specie  pay- 
ments was  also  defective.  An  arrangement  was  made  with 
the  leading  banks  of  New  York,  Philadelphia,  and  Rich- 
mond for  the  resumption  of  specie  payments  by  them  on 
February  20,  1817.  The  public  deposits  in  these  banks, 
which  the  government  had  been  unwilling  to  accept  in  de- 
preciated bank  paper,  were  to  be  transferred  to  the  Bank  of 
the  United  States,  but  checks  on  the  State  banks  which  were 
parties  to  the  agreement  received  by  the  Bank  of  the  United 
States  were  to  be  credited  as  cash.  Arrangements  were  also 
made  for  liberal  discounts  by  the  new  bank,  in  order  to  re- 
lieve the  local  banks  from  the  commercial  pressure. 

These  features  of  the  resumption  policy  were  not  subject 
to  criticism  and  $7,472,419  in  public  funds  and  $3,336,491  in 
special  deposits  were  transferred  from  the  State  banks  to  the 


the  United  States.  The  national  banks  created  under  the  Act  of  June 
3,  1864,  for  many  years  availed  themselves  of  this  condition  to  have 
as  large  a  proportion  of  their  reserves  as  possible  in  United  States 
notes  at  the  times  when  their  property  became  subject  to  assessment 
for  taxation  under  State  laws.  This  practice  led  to  an  act  of  Congress 
in  1894,  authorizing  the  States  to  tax  such  notes  at  the  same  rate  as 
other  money.  It  was  long  held  that  the  instruments  of  State  sover- 
eignty were  exempt  from  Federal  taxation  upon  the  same  grounds  that 
the  instruments  of  Federal  sovereignty  were  exempt  from  State  taxa- 
tion, but  this  view  was  overruled  in  regard  to  the  circulating  notes  of 
State  banks  in  the  case  of  Veazie  Bank  vs.  Fenno,  8  Wall.,  533.  See 
Kent,  I.,  429,  note. 


THE  BANK  OF   THE    UNITED   STATES.  347 

central  bank  at  Philadelphia.  Eighteen  branches  of  the 
Bank  of  the  United  States  were  established  and  the  notes 
issued  were  received  for  government  dues  without  reference 
to  the  place  of  issue  and  were  redeemable,  wherever  issued, 
by  the  central  bank  or  any  of  its  branches.  The  mistake 
made  by  the  new  bank  was  in  directing  the  branches  to  push 
their  own  notes  into  circulation  in  place  of  those  of  the  State 
banks,  and  to  issue  drafts  on  the  Eastern  cities  to  prevent 
the  remittance  of  their  own  notes.  The  notes  of  the  local 
banks  were  locked  up  in  the  Bank  of  the  United  States  and 
interest  charged  upon  them  to  the  local  banks,  but  both  the 
notes  of  the  branches  and  the  branch  drafts  were  remitted 
eastward  by  the  operations  of  trade.  The  notes  of  the 
Western  branch  banks  which  were  remitted  to  the  East  thus 
exercised  no  controlling  influence  over  the  volume  of 
Western  business,  for  they  were  not  presented  for  redemp- 
tion in  the  West.  What  made  the  matter  worse  was  the 
necessity  imposed  in  many  cases  on  the  branches,  in  view 
of  the  eastward  movement  of  their  own  notes,  to  pay  out 
again  the  local  notes  in  the  granting  of  discounts. 

The  Western  branches  paid  but  limited  attention  to  the 
instructions  of  the  parent  bank  to  diminish  their  discounts, 
even  after  the  danger  of  their  policy  became  apparent. 
They  issued  what  were  known  as  "race-horse  bills,"  by 
which  drafts  were  made  by  one  branch  upon  another,  which 
were  met  when  due  at  the  accepting  bank  by  new  drafts 
upon  some  other  branch.  The  bank  imported  $7,311,750 
in  specie  from  Europe  during  its  first  two  years  at  a  cost  of 
$525,247,'  but  the  drain  upon  its  resources  had  reduced  the 
specie  in  Philadelphia  on  April  21,  1819,  to  $i"26,745,  of 
which  $79,125  was  owed  to  the  city  banks  of  Philadelphia.2 
The  facts  regarding  the  mismanagement  of  the  bank  were 
brought  out  by  the  report  of  a  committee  of  Congress  in 
1819  and  caused  many  demands  for  the  repeal  of  the  charter. 
L,angdon  Cheves  was  elected  President,  March  6,  1819,  and  he 
adopted  heroic  measures  to  restore  the  bank  to  solvency. 

1  Poor,  486. 

2  Bolles,  II.,  326. 


348          HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

He  borrowed  $2,500,000  in  specie  of  the  Barings,  who  were 
considerable  holders  of  the  bank  stock,  forbade  the  issue  of 
notes  in  the  South  and  West  when  exchanges  were  against 
the  branches,  which  was  almost  invariably  the  case,  and  in 
dealings  with  the  government  insisted  upon  the  interval 
between  the  transfer  of  funds  and  their  disbursement  which 
was  actually  required  for  the  transfers.  The  bank  was 
saved  and  was  conducted  with  comparative  prudence  until 
the  breaking  out  of  the  war  with  President  Jackson. 

The  second  Bank  of  the  United  States  undoubtedly 
contributed  for  more  than  a  decade  to  facilitate  the  transfer 
of  funds  from  one  part  of  the  country  to  another  and  to 
maintain  a  uniform  circulation  equal  to  coin.  The  rates  of 
domestic  exchange,  which  were  necessarily  high  because 
of  the  imperfect  means  of  communication,  were  materially 
reduced  by  the  bank.  Its  policy  greatly  benefited  com- 
merce, but  invited  bitter  complaints  from  the  private  dealers 
in  exchange,  who  had  been  enabled  to  make  excessive  prof- 
its while  the  currency  was  below  par  because  of  its  different 
values  in  different  States  and  the  constant  fluctuations  in 
these  values.  The  bank,  in  the  language  of  the  report  of 
Senator  Smith  of  Maryland  in  1832,  furnished  c<  a  currency 
as  safe  as  silver,  more  convenient,  and  more  valuable  than 
silver,  which  through  the  whole  Western  and  Southern  and 
interior  parts  of  the  Union,  is  eagerly  sought  in  exchange 
for  silver  ;  which,  in  those  sections,  often  bears  a  premium 
paid  in  silver  ;  which  is,  throughout  the  Union,  equal  to 
silver,  in  payment  to  the  government,  and  payments  to 
individuals  in  business."  Mr.  McDufrie,  who  submitted  the 
minority  report  in  the  House  at  the  same  time,  declared  that 
' '  The  whole  business  of  dealing  in  domestic  bills  of  ex- 
change, so  essential  to  the  internal  commerce  of  the  country, 
has  been  almost  entirely  brought  about  within  the  last  eight 
37ears.  In  June,  1819,  the  bank  did  not  own  a  single  dollar  of 
domestic  bills  ;  and  in  December,  1824,  it  owned  only  to 
the  amount  of  $2, 378, 980;  whereas  it  now  owns  to  the 
amount  of  $23,052,972."  ' 

1  House  Rep.,  460,  22d  Cong.,  ist  Sess.,  312. 


THE  BANK  OF   THE    UNITED   STATES.  349 

One  of  the  most  serious  charges  of  evasion  of  law,  brought 
against  the  bank  in  1832,  was  in  the  issue  of  branch  drafts 
to  circulate  as  currency.  Several  appeals  were  made  in  vain 
to  Congress  to  modify  one  of  the  provisions  of  the  charter 
requiring  the  president  and  principal  cashier  to  sign  all  the 
circulating  notes.  The  volume  of  circulation  necessary  to 
do  business  was  so  great  that  the  physical  labor  of  signature 
could  not  well  be  performed  by  those  officers.  Congress 
neglected  to  act  and  in  1827  an  opinion  was  obtained  from 
Horace  Binney,  in  which  Daniel  Webster  and  William  Wirt 
concurred,  that  there  was  no  legal  obstacle  to  the  issue  of 
checks  drawn  by  officers  of  the  branches  upon  the  parent 
bank,  printed  for  even  amounts  in  similar  form  to  bank- 
notes. Drafts  of  this  sort  for  $5  and  $10  were  authorized  by 
the  board  of  directors  on  April  6,  1827,  and  denominations 
of  $20  were  issued  in  1 83 1 .  They  became  a  common  medium 
of  circulation  in  the  South  and  West  and  were  accepted  in 
payments  to  the  United  States  Treasury.1  The  branch 
drafts  outstanding  in  April,  1832,  were  $7,410,090.  They 
simply  served  the  purpose  of  currency  without  conforming 
strictly  to  the  intent  of  the  law,  in  much  the  same  manner 
as  the  checks  of  the  I^ondon  Cheque  Bank  or  the  temporary 
issues  in  the  United  States  during  the  panic  of  1893. 

The  Bank  of  the  United  States  fell  because  so  great  an 
institution  in  a  representative  republic  could  not  escape 
political  entanglements  and  the  suspicion  of  the  abuse  of 
political  power.  President  Jackson  surprised  the  financial 
world  by  the  announcement,  in  his  first  annual  message  in 
1829,  that  "Both  the  constitutionality  and  the  expediency 
of  the  law  creating  the  bank  are  well  questioned  by  a  large 
portion  of  our  fellow-citizens  ;  and  it  must  be  admitted 
by  all,  that  it  has  failed  in  the  great  end  of  establishing  a 
uniform  and  sound  currency."  The  bank  was  at  this  time 
under  the  presidency  of  Nicholas  Biddle,  who  succeeded 

1  Letter  of  Sec.  Rush  to  Nicholas  Biddle,  Jan.  21,  1820.  House  Rep., 
460,  22d  Cong.,  ist  Sess.,  55.  The  authority  to  receive  these  drafts 
for  public  dues  was  revoked  by  Secretary  Woodbury,  to  take  effect 
January  I,  1835. 


35°        HISTORY  OP  MODERN  BANKS  OF  ISSUE. 

Cheves  in  1823,  and  was  one  of  the  most  imposing  institu- 
tions of  the  country.  The  President's  message,  therefore, 
was  in  the  nature  of  a  thunderbolt  from  a  clear  sky.  Jack- 
son's hostility  was  due  to  a  complaint  by  Isaac  Hill,  a  New 
Hampshire  politician  who  had  been  made  Second  Comp- 
troller, that  Mr.  Mason,  the  manager  of  the  branch  at 
Portsmouth,  New  Hampshire,  had  shown  partiality  to  the 
political  opponents  of  General  Jackson  and  that  his  conduct 
had  been  "  calculated  not  less  to  injure  the  institution  than 
to  disgust  and  disaffect  the  principal  business  men."  "  No 
measure  short  of  his  removal,"  in  Hill's  opinion,  "would 
tend  to  reconcile  the  people  of  New  Hampshire  to  the 
bank." 

The  truth  appears  to  have  been  that  Mason  had  excited 
hostility  by  his  energetic  contraction  of  discounts  at  Ports- 
mouth and  his  efforts  to  correct  previous  mismanagement. 
I^evi  Woodbury,  who  had  defeated  Mason  for  the  United 
States  Senate  in  1824,  addressed  a  letter  early  in  July,  1829,  to 
Mr.  Ingham,  the  Secretary  of  the  Treasury,  making  com- 
plaints against  Mason's  management,  which  Ingham  for- 
warded to  President  Biddle  for  his  consideration.  Biddle 
was  a  ready  writer,  he  occupied  one  of  the  most  powerful 
positions  in  the  country,  he  was  surrounded  by  flatterers 
and  sycophants,  and  he  was  quickly  entrapped  into  a  quarrel 
which  resulted  in  the  overthrow  of  the  bank.  He  not  only 
denied  that  the  bank  had  shown  political  favor  at  Ports- 
mouth or  elsewhere,  but  went  out  of  his  way  to  declare  that 
the  governing  board  acknowledged  no  responsibility  what- 
ever to  the  Secretary  of  the  Treasury  in  regard  to  the  politi- 
cal opinions  of  the  officers  of  the  bank  and  that  it  was 
carefully  shielded  by  its  charter  from  executive  control.  So 
fixed  had  become  the  relations  between  the  bank  and  the 
Treasury  in  the  handling  of  public  monies,  and  so  much  a 
matter  of  mere  routine,  that  Biddle  appeared  to  overlook  the 
possibility  of  the  withdrawal  of  the  public  deposits.  He 
evidently  had  no  realizing  sense  of  the  danger  which  hung 
over  his  head  or  of  the  spirit  of  hostility  which  was  being 
aroused  in  the  mind  of  Jackson. 


THE  BANK  OF  THE  UNITED   STATES.  35! 

The  President's  suggestions  in  his  annual  message  excited 
the  fear  for  a  moment  that  he  had  information  which  was 
not  known  to  the  public  and  bank  shares  dropped  from  125 
to  116,  only  to  recover  to  130  after  a  report  by  a  committee 
of  Congress.  The  portions  of  the  message  relating  to  the 
bank  were  referred  to  committees  in  both  houses,  both  of 
which  exonerated  the  bank  from  the  charge  of  bad  manage- 
ment and  condemned  the  suggestion  of  the  President, 
whether  a  national  bank,  ' '  founded  upon  the  credit  of  the 
government  and  its  revenues,  might  not  be  devised  which 
would  avoid  all  constitutional  difficulties,  and  at  the  same 
time,  secure  all  the  advantages  to  the  government  and  coun- 
try that  were  expected  to  result  from  the  present  bank." 
The  House  on  May  10,  1830,  tabled,  by  a  vote  of  89  to  66, 
resolutions  that  the  House  would  not  consent  to  the  renewal 
of  the  bank  charter  and  on  May  29th  tabled,  by  a  vote  of 
95  to  67,  resolutions  calling  for  a  comprehensive  report  of 
the  proceedings  of  the  bank.1  Similar  votes  in  favor  of  the 
bank  were  given  in  the  Senate.  The  President  was  mild  in 
his  allusions  to  the  subject  in  the  annual  messages  of  1830 
and  1831  and  the  Secretary  of  the  Treasury  was  even  allowed 
in  the  latter  year  to  incorporate  in  his  annual  report  a  strong 
argument  in  the  bank's  favor.  It  is  not  improbable  that 
Jackson  might  have  been  persuaded  by  the  eminent  finan- 
ciers of  his  party  to  consent  to  a  re-charter  if  the  matter  had 
not  been  made  an  issue  by  Henry  Clay  in  the  presidential 
campaign. 

The  political  dangers  of  a  great  central  bank  were  demon- 
strated in  the  campaign  of  1832.  President  Jackson  had 
given  the  country  in  the  main  a  firm  and  successful  admin- 
istration and  it  was  necessary  for  Clay  and  the  Whigs  to 
create  political  issues  upon  which  to  make  a  respectable 
contest  against  him.  There  were  dangers  in  making  the 
tariff  the  controlling  issue,  because  different  Whig  States 
were  on  both  sides  of  the  question.  Clay  determined  to 
make  the  campaign  upon  the  issues  of  internal  improvement 
and  the  recharter  of  the  bank.  It  was  natural  that  he  should 

1  Sumner,  Andrew  Jackson,  247. 


35 2          HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

accept  the  sentiment  of  the  financial  portion  of  the  commu- 
nity in  favor  of  the  bank  as  the  sentiment  of  the  whole  and 
he  was  so  confident  of  success  that  he  feared  Jackson  would 
evade  the  issue.  The  resolutions  adopted  at  Baltimore  on 
December  12,  1831,  at  Clay's  instigation,  declared  that  the 
President,  "is  fully  and  three  times  over  pledged  to  the 
people  to  negative  any  bill  that  may  be  passed  for  recharter- 
ing  the  bank. ' '  Biddle  and  the  real  friends  of  the  bank  who 
were  not  politicians  protested  strongly  against  making  the 
recharter  a  party  issue,  but  Clay  forced  them  to  the  choice 
between  sustaining  his  party  as  the  friends  of  the  bank  or 
going  without  political  friends.  Professor  Sumner  declares 
that  "Jackson  never  was  more  dictatorial  and  obstinate  than 
Clay  was  at  this  juncture."  1 

The  fight  was  opened  in  the  Senate  on  January  9,  1832, 
when  Senator  Dallas  presented  the  memorial  of  the  bank  for 
the  renewal  of  its  charter.  Biddle  came  to  Washington, 
opened  headquarters,  gave  sumptuous  entertainments,  and 
defended  the  bank  vigorously  before  the  committee  of  inves- 
tigation appointed  by  Congress.  The  bill  for  the  recharter 
was  passed  through  both  houses,  only  to  encounter  a  veto 
message  from  President  Jackson  on  July  loth.  The  issue 
was  thus  made  up  for  the  presidential  election,  exactly  as 
Clay  desired  it,  but  the  response  of  the  people  was  219  elec- 
toral votes  for  Jackson,  49  for  Clay,  and  18  for  all  others. 
The  executive  triumphed,  as  usual  in  a  contest  with  Con- 
gress, and  the  doom  of  the  bank  was  decided. 

The  bank  had  five  years  of  life  before  it.  Its  credit  was 
good  and  it  still  held  the  public  deposits.  It  was  not  gener- 
ally supposed  that  these  would  be  withdrawn  until  near  the 
date  for  the  termination  of  the  charter,  as  had  been  the  case 
with  the  public  deposits  in  the  first  Bank  of  the  United 
States.  Jackson's  blood  was  now  up,  however,  and  he 
needed  no  further  stimulus  to  crush  his  enemy.  The  bank 
made  two  serious  blunders  during  1832  and  1833  in  its  rela- 
tions with  the  Treasury.  It  undertook  to  make  a  private 
arrangement  with  the  Barings  regarding  the  payment  of 

1  Andrew  Jackson,  257. 


THE  BANK  OF  THE  UNITED   STATES.  353 

$5,000,000  of  government  three  per  cent,  securities,  which 
the  Secretary  of  the  Treasury  had  notified  the  President  of 
the  bank  as  early  as  March  24,  1832,  would  be  paid  from  the 
surplus  revenues.  A  contract  was  made  through  a  private 
agent  of  the  bank  for  extending  these  securities,  which  were 
to  be  assumed  by  the  bank  and  the  interest  paid  to  the  gov- 
ernment. The  object  was  to  retain  possession  of  the  public 
money,  on  deposit  with  the  bank,  which  was  worth  seven 
per  cent,  in  the  discount  market,  rather  than  permit  it  to  be 
withdrawn  for  the  redemption  of  the  debt.  When  the  cir- 
cular of  the  Barings  got  into  the  newspapers  in  October, 
Biddle  was  obliged  to  disavow  the  contract  and  made  a  lame 
explanation  to  Secretary  Mcl^ane  for  seeking  to  delay  the 
payment.  The  other  case  was  the  attempt  to  collect  dam- 
ages upon  the  amount  of  a  bill  of  exchange  drawn  upon  the 
French  government,  which  was  refused  payment  by  the 
French  Minister  of  Finance,  because  the  money  had  not 
been  appropriated  by  the  Chambers.  The  bill  was  taken  up 
by  the  Paris  agents  of  the  bank,  and  charged  against  it. 
Secretary  Mcl^ane  paid  the  principal,  $961,240,  which  had 
been  covered  into  the  Treasury,  back  to  the  bank  and 
offered  to  pay  actual  costs.  The  bank  insisted  upon  fifteen 
per  cent,  damages,  under  a  law  of  the  District  of  Columbia 
relating  to  protested  paper,  and  deducted  the  amount  from 
the  government  dividends.  The  government  sued  and  the 
Supreme  Court  decided  against  the  bank. 

Performances  like  these  on  the  part  of  President  Biddle 
convinced  Jackson  that  the  bank  was  weak  and  confirmed 
his  purpose  to  suspend  the  further  deposit  of  public  monies 
in  its  custody.1  Mr.  McL,ane  was  transferred  from  the 
Treasury  to  the  State  Department  during  the  spring  of  1833 
and  William  J.  Duane  of  Pennsylvania  was  made  Secretary 
of  the  Treasury.  Duane  was  a  conservative  and  able  law- 
yer, with  little  of  the  politician  in  his  make-up,  and  when 

1  Jackson  also  believed  that  if  the  bank  retained  the  public  funds, 
it  would  be  able  to  buy  up  the  votes  in  Congress  necessary  to  make 
two-thirds  and  pass  a  recharter  bill  over  his  veto. — Sumner,  Andrew 
Jackson,  299. 


354         HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

the  President  insisted  upon  his  suspending  deposits  in  the 
Bank  of  the  United  States  and  making  them  in  future  in  the 
State  banks,  Duane  refused  to  comply  and  the  President  re- 
moved him  from  office.  Roger  B.  Taney,  who  afterwards 
became  so  odious  in  the  free  States  as  Chief  Justice  of  the 
Supreme  Court,  was  transferred  from  the  Department  of  Jus- 
tice to  the  Treasury  on  September  23d,  and  began  the  deposit 
of  the  public  funds  in  the  State  banks. 

The  contest  which  followed  in  Congress  belongs  to  the  his- 
tory of  politics  rather  than  that  of  finance.  The  Senate  re- 
jected the  nomination  of  Taney  for  Secretary  of  the  Treasury 
and  rejected  the  President's  nominees  for  government  direc- 
tors of  the  bank,  apparently  upon  the  remarkable  ground 
that  they  were  disposed  to  insist  upon  too  accurate  a  knowl- 
edge of  the  bank's  affairs.  The  Senate  called  for  the  paper 
which  Jackson  had  read  in  the  cabinet  regarding  the  removal 
of  the  deposits  on  September  i8th,  and  received  the  reply 
that  the  Senate  had  no  constitutional  right  to  interrogate 
him  on  the  subject  of  his  communications  with  his  heads  of 
departments.  Clay  introduced  a  resolution  which  was  passed 
on  March  28,  1834,  by  a  vote  of  26  to  20,  declaring  that  the 
President  had,  "  assumed  upon  himself  authority  and  power 
not  conferred  by  the  Constitution  and  the  laws,  but  in  deroga- 
tion of  both."  The  President  sent  a  protest  against  this 
resolution  to  the  Senate  on  April  lyth,  which  that  body  ten 
days  later  voted,  27  to  16,  was  a  breach  of  the  privileges  of 
the  Senate  and  should  not  be  entered  on  the  journal.  The 
friends  of  Jackson  appealed  to  the  people  and  gained  enough 
seats  in  the  Senate  to  pass  resolutions  on  January  16,  1837, 
expunging  the  previous  resolutions  from  the  records. 

The  Bank  of  the  United  States  obtained  a  charter  from  the 
State  of  Pennsylvania  on  February  18,  1836,  for  thirty  years. 
The  bank  agreed  to  pay  a  bonus  of  $2,000,000  to  the  State 
and  $100,000  per  year  for  thirty  years,  besides  various  sub- 
scriptions to  the  stock  of  transportation  routes,  which  Ben- 
ton  described  as  bribery  of  the  legislature  and  the  people. 
The  shares  in  the  bank  owned  by  the  United  States,  amount- 
ing to  $7,000,000,  were  paid  in  four  annual  instalments  at 


THE  BANK  OF  THE  UNITED   STATES. 


355 


the  rate  of  115.58.  New  stock  was  sold  to  replace  the  gov- 
ernment stock,  leaving  the  capital  intact  at  $35,000,000. 
The  capital  was  too  large  for  local  commercial  needs  and 
Biddle  branched  out  into  loans  on  stocks  of  uncertain  value, 
many  of  which  proved  worthless  after  the  crisis  of  1837. 
The  bank  suspended  at  that  time  with  the  other  banks  of 
the  country,  but  was  compelled  to  suspend  again  in  1838, 
and  again  in  1841,  after  which  it  went  into  liquidation.  The 
creditors  were  paid,  but  the  shareholders  lost  their  entire 
interest.  Biddle  had  resigned  in  March,  1839,  leaving  the 
bank,  according  to  his  view,  in  a  prosperous  condition.  He 
was  indicted  during  the  liquidation  for  conspiracy  to  defraud 
the  shareholders.  The  indictment  was  quashed,  but  Biddle 
was  ruined  financially  and  died  within  five  years  insolvent 
and  broken-hearted.1 

The  principal  items  in  the  accounts  of  the  second  Bank  of 
the  United  States  up  to  the  time  of  its  final  suspension  are 
shown  in  the  following  table  : 


YEAR. 

LOANS. 

DEPOSITS. 

CIRCULATION. 

SPECIE. 

1820 

$31,401,158 

$    6,568,7Q4 

$    3,598,481 

$    3,392,755 

1830 

4O,663,8O5 

l6,O45,782 

12,924,145 

7,608,076 

1834 

54,911,461 

10,838,555 

19,208,379 

10,039,237 

1835 

51,808,739 

11,756,905 

17,339,797 

15,708,369 

1836 

59,232,445 

5,061,456 

23,075,422 

8,4X7,988 

1837 

57,393,709 

2,332,409 

11,447,968 

2,638,449 

1838 

45,256,571 

2,6l6,7l3 

6,768,067 

3,770,842 

1839 

4I,6l8,637 

6,779,394 

5,982,621 

4,153,607 

I84O 

36,839,593 

3,338,521 

6,695,861 

1,469,674 

The  present  method  of  dealing  with  public  monies  in  the 
United  States  is  one  of  the  results  of  the  war  over  the  United 
States  Bank.  Secretary  Taney,  under  Jackson's  instruc- 
tions, deposited  public  money  in  certain  State  banks, — most 
of  them  selected  because  their  officers  were  friendly  to  the 
administration  and  characterized  by  its  critics  as  the  * '  pet 
banks."  The  government  imposed  upon  them  the  condi- 
tions of  giving  security  in  certain  cases,  of  issuing  no  small 

1  Sumner,  Andrew  Jackson,  342. 


356         HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

notes  and  of  keeping  one- third  of  their  reserve  in  specie.1 
The  State  banks  undertook  by  mutual  agreement  to  honor 
each  other's  notes  and  drafts,  but  the  crisis  of  1837  caused 
a  general  suspension  and  the  payment  of  $25,000,000  of  the 
deposits  in  bank-notes  bearing  an  average  depreciation  of  ten 
per  cent.  Secretary  Taney  in  his  report  for  1834  urged  legis- 
lation to  sanction  the  use  of  the  State  banks  as  depositaries, 
but  the  bill  prepared  on  the  subject  failed  in  the  Senate. 
The  suspension  of  the  banks  in  1837  led  President  Van  Buren, 
in  his  annual  message  of  that  year,  to  recommend  that  the 
public  funds  be  kept  exclusively  by  public  officers  and  that 
nothing  but  specie  be  received  for  dues  to  the  government. 
This  plan — embodying  substantially  the  features  of  the 
present  independent  treasury  system — was  several  times  de- 
feated, but  was  finally  enacted  June  30,  1840.  One-fourth  of 
all  dues  to  the  Treasury  were  to  be  paid  at  once  in  specie, 
and  an  additional  fourth  each  year  until  the  whole  were  thus 
paid. 

The  success  of  Harrison  and  the  Whigs  resulted  in  the 
repeal  of  the  independent  treasury  law  August  13,  1841,  and 
two  national  bank  bills  were  passed,  only  to  be  successively 
vetoed  by  President  Tyler.  The  public  monies  were  de- 
posited in  the  banks  or  not,  at  the  discretion  of  public  offi- 
cials, until  1846,  when  the  independent  treasury  system  was 
again  established  by  authority  of  Congress.  The  policy  of 
refusing  State  bank-notes  for  government  dues  continued 
until  the  creation  of  the  national  banking  system  during  the 
Civil  War.  That  system  gave  the  government  the  security 
of  its  own  bonds  for  the  bank-notes,  and  the  national  bank- 
ing act  provided  that  the  notes  should  be  "  received  at  par 
in  all  parts  of  the  United  States  in  payment  of  taxes,  ex- 
cises, public  lands,  and  all  other  dues  to  the  United  States, 
except  for  duties  on  imports ;  and  also  for  all  salaries  and 
other  debts  and  demands  owing  by  the  United  States  to  in- 
dividuals, corporations,  and  associations  within  the  United 
States,  except  interest  on  the  public  debt,  and  in  redemption 


Kinley,  17. 


THE  BANK  OF  THE  UNITED   STATES.  357 

of  the  national  currency."  1  The  national  banks  were  again 
made  the  depositaries  of  public  money  during  the  first  ad- 
ministration of  President  Cleveland,  but  were  required  by 
the  Secretary  of  the  Treasury  to  deposit  United  States  bonds 
as  security  for  such  monies  in  much  the  same  manner  as  for 
the  security  of  national  bank-notes.  The  amount  of  deposits 
in  the  banks  on  August  i,  1888,  when  Secretary  Fairchild 
made  a  report  on  the  subject  to  Congress,  was  $54,475,055, 
exclusive  of  $4, 052, 021  on  deposit  to  the  credit  of  disbursing 
officers.  The  number  of  banks  among  which  these  deposits 
were  distributed  was  about  three  hundred  and  the  largest 
deposit  was  $1,100,000.  The  policy  of  Secretary  Windom 
and  the  absorption  of  the  surplus  reduced  these  deposits  after 
1892  and  their  entire  amount  on  January  2,  1896,  was  $14,- 
271,280.*  The  independent  Treasury  continues  to  transact  the 
bulk  of  the  public  business  and  sub-treasuries  are  maintained 
at  New  York,  Philadelphia,  Boston,  Baltimore,  Cincinnati, 
Chicago,  St.  Louis,  New  Orleans,  and  San  Francisco. 

1  Act  of  June  3,  1864,  Sec.  23. 

2  The  resumption  of  the  deposit  policy  in  1902  is  described  infra,  436 


CHAPTER  XIV. 

THE   STATE   BANKING  SYSTEMS. 

The  Condition  of  the  Country  When  They  were  Adopted— Success 
of  the  Suffolk  System  and  of  Banking  on  General  Assets — The 
New  York  Safety  Fund  and  Security  Systems — Unhappy  Experi- 
ence in  the  West  and  South  with  Banks  of  State— The  Effects  of 
the  Civil  War — Failure  of  the  Security  System — General  Statis- 
tics of  the  State  Banks. 

THE  systems  of  banking  authorized  under  the  laws  of 
the  various  States  of  the  United  States  offer  examples 
of  nearly  every  form  of  note  issues  and  every  degree 
of  success  or  failure.  The  economic  development  of  the 
country  between  the  Revolution  and  the  Civil  War  was  in 
an  experimental  stage  as  well  as  its  political  development. 
The  rules  of  sound  banking  had  not  yet  been  worked  out 
even  in  the  older  countries  of  Europe,  as  the  mistakes  and 
failures  of  English,  French,  and  Austrian  banking  abund- 
antly show  ;  but  to  ordinary  sources  of  error  and  risk  were 
added  in  the  United  States  the  elements  of  experiment  and 
uncertainty  in  every  department  of  human  activity.  The 
Englishman  or  Frenchman  might  not  be  a  good  banker,  but 
he  could  at  least  form  an  intelligent  estimate  of  the  volume 
of  trade  with  which  he  had  to  reckon  and  the  conditions  un- 
der which  it  was  carried  on.  His  problem  was  simply  to 
work  out,  according  to  sound  rules,  a  mathematical  prob- 
lem for  which  the  necessary  elements  were  known.  With 
the  American,  on  the  other  hand,  every  element  was  an  un- 
known quantity.  He  had  to  guess  at  the  first  element  in  his 
equation,  and  if  he  guessed  wrongly  absolute  accuracy  in 

358 


THE  STATE  BANKING  SYSTEMS.  359 

his  further  computations  could  not  possibly  yield  a  true 
result. 

A  new  country,  poor  in  specie  and  in  loanable  capital,  is 
almost  forced  by  the  necessities  of  her  situation  to  adopt 
monetary  devices  which  would  not  be  tolerated  under  better 
conditions.  Some  of  these  devices  would  be  comparatively 
harmless  if  their  true  character  were  understood  and  they 
were  used  with  moderation  ;  but  their  tendency  is  mislead- 
ing and  intoxicating  to  the  average  mind  and  they  are  usu- 
ally so  abused  as  to  offset  the  little  benefit  which  might  be 
derived  from  them.  The  most  successful  banking  systems 
under  State  law  in  the  United  States  were  those  of  New 
York  and  New  England,  where  the  surplus  capital  of  the 
country  in  the  earlier  days  was  concentrated.  The  least  suc- 
cessful systems  were  in  the  newer  and  poorer  sections  of  the 
country  and  they  grew  progressively  worse  as  inexperience 
and  poverty  seemed  to  make  more  imperative  the  necessity 
for  creating  something  out  of  nothing.  Four  distinctly 
marked  systems  of  note  issue  were  in  operation  in  the  United 
States  side  by  side  almost  up  to  the  close  of  the  Civil  War 
and  it  is  not  surprising  that  the  conglomerate  currency 
which  they  created  has  left  unsavory  memories  behind  it. 
These  four  systems  were  :  Issues  upon  general  assets  ;  issues 
protected  by  a  general  safety  fund  ;  issues  based  upon  public 
securities  ;  and  issues  based  upon  the  faith  and  credit  of  the 
States.1 


1  The  principal  sources  for  the  preparation  of  this  chapter  have  been 
the  monographs  prepared  by  Mr.  I,.  Carroll  Root  for  the  "  Sound 
Currency  Committee  "  of  the  New  York  Reform  Club  ;  the  report  of 
John  J.  Knox,  the  United  States  Comptroller  of  the  Currency,  for 
1876  ;  the  report  prepared  by  Mr.  Henry  H.  Smith,  Assistant  Register 
of  the  Treasury,  in  response  to  Senate  resolutions  of  July  26,  1892, 
printed  as  Sen.  Ex.  Doc.  38,  52d  Cong.,  2d  Sess.  ;  and  the  report  of 
Comptroller  A.  B.  Hepburn  for  1892.  The  investigations  of  these 
gentlemen  have  brought  together  and  co-ordinated  a  mass  of  material 
which  would  otherwise  have  to  be  sought  with  great  labor  from  a 
variety  of  sources.  Mr.  Root  has  further  favored  me  with  an  examina- 
tion of  this  chapter  and  the  suggestion  of  some  changes,  which  I  have 
adopted. 


360         HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

The  best  illustration  of  the  system  of  banking  upon  gen- 
eral assets  is  afforded  by  the  banks  of  New  England,  and 
especially  by  the  banks  of  Boston,  which  became  the  centre 
of  the  New  England  redemption  system.  The  note  issues 
of  the  New  England  banks  were  permitted  in  many  cases 
to  exceed  the  proportion  to  capital  which  is  now  consid- 
ered safe,  and  they  were  not  subject  until  late  in  their 
history  to  thorough  official  supervision  ;  but  in  spite  of 
these  defects  of  the  system,  the  notes  usually  circulated  at 
par  and  specie  was  attracted  to  New  England  when  driven 
from  other  sections  of  the  country  by  depreciated  paper. 
The  first  local  bank  in  New  England,  and  the  second  of  the 
kind  in  the  United  States,  was  incorporated  by  act  of  the 
General  Court  of  Massachusetts  on  February  7,  1784,  with 
a  maximum  capital  of  $300,000,  and  was  called  the  Mas- 
sachusetts Bank.  No  limitations  were  imposed  in  the  original 
Massachusetts  law  upon  note  issues,  but  an  act  of  1792  pro- 
hibited notes  below  $5,  and  the  bank  was  directed  to  limit 
the  amount  of  notes,  together  with  "  money  loaned  by  them 
by  a  credit  on  their  books  or  otherwise, "  to  ' '  twice  the 
amount  of  their  capital  stock  in  gold  and  silver,  actually 
deposited  in  the  banks  and  held  to  answer  the  demands 
against  the  same."  A  general  law  was  passed  in  1799,  pro- 
hibiting banking  by  unincorporated  companies  or  the  fur- 
ther issue,  except  by  the  Nantucket  Bank,  of  notes  below 
$5.  This  provision  was  modified  in  1805  so  as  to  permit  the 
issue  of  bills  of  $i,  $2,  and  $3  to  the  amount  of  five  per  cent, 
of  paid-up  capital.  This  limit  wasincreased  in  1809  to  fifteen 
per  cent.,  reduced  in  1812  to  ten  per  cent.,  and  again  in- 
creased in  1818  to  twenty-five  per  cent.,  which  remained  the 
limit  during  the  life  of  the  State  banking  system.1 

An  act  was  passed  in  1803,  requiring  semi-annual  re- 
ports of  condition  by  the  Massachusetts  banks  to  the  State 
officials,  and  it  appeared  that  at  that  time  seven  banks  were 
in  operation  with  a  capital  of  $2,225,000  and  a  circulation  of 
$1,565,000.  An  attempt  was  made  in  1811  to  found  a  State 

1Root,  New  England  Bank  Currency,  "Sound  Currency,"  Vol. 
II.,  No.  13,  p.  4. 


THE  STATE  BANKING  SYSTEMS.  361 

bank  occupying  a  similar  relation  to  the  Commonwealth 
that  the  United  States  Bank  had  occupied  towards  the 
national  government,  but  the  State  capital  was  never  sub- 
scribed and  the  authorized  capital  was  reduced  in  1817 
from  $3,000,000  to  $i, 800,000. 1  The  charter  of  this  bank 
and  of  the  Merchants'  Bank,  also  incorporated  in  1811, 
served  as  the  model  from  which  most  subsequent  charters  in 
Massachusetts  were  drawn.  One-fifth  of  the  capital  was 
required  to  be  actually  paid  in  before  the  beginning  of 
business  ;  the  stockholders  were  individually  liable  to  the 
amount  of  their  stock  in  case  of  loss  arising  from  misman- 
agement, and  the  liabilities,  exclusive  of  deposits,  were 
limited  to  twice  the  amount  of  the  capital.  The  limit  upon 
circulation,  which  was  thus  incidentally  imposed,  was  re- 
duced in  the  case  of  most  of  the  later  banks  to  150  per  cent. 
The  Massachusetts  and  other  New  England  banks  main- 
tained specie  payments  in  1814,  when  those  of  other  parts  of 
the  country  suspended,  and  the  current  of  specie  towards 
New  England  swelled  the  holdings  of  the  Massachusetts 
banks  alone,  from  $1,513,000  in  1811  to  $6,946,542  in  1814. 
The  total  banking  capital  authorized  had  increased  in  1828 
to  $9,075,000  and  thirty-six  new  banks  were  incorporated 
in  the  four  years  ending  with  that  date.  A  new  banking 
law  was  passed  on  February  28,  1829,  which  applied  to  banks 
thereafter  incorporated  and  to  those  obtaining  an  increase  of 
capital  or  an  extension  of  their  charters.  The  limit  of  the 
notes  which  a  bank  might  circulate  was  reduced  to  125  per 
cent,  of  the  capital  and  the  total  of  the  debts,  exclusive  of 
deposits,  was  limited  to  twice  the  capital.  A  provision  was 
made  against  the  practice  of  issuing  notes  promising  pay- 

1  The  State  subscribed  $400,000  to  the  capital  of  the  Union  Bank  of 
Boston,  which  was  incorporated  in  1792,  and  was  generally  a  subscri- 
ber at  the  formation  of  new  banks  for  the  next  twenty  years.  About 
$1,000,000  of  bank  stock  in  this  way  came  into  the  hands  of  the  State 
and  afforded  a  generous  dividend  until  it  was  sold  in  1812  to  meet 
some  unusual  expenses.  The  State  does  not  seem  to  have  abused  its 
share  in  the  ownership  by  interference  with  the  management  of  the 
banks. — Martin's  Boston  Stock  Market,  cited  in  Comptroller's  Report 
for  1876. 


362          HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

ment  with  interest  at  a  future  date,  by  which  the  banks  had 
endeavored  to  escape  the  obligation  to  pay  cash  on  demand 
to  depositors  and  note-holders.  An  effort  was  made  to  evade 
this  provision  by  issuing  deposit  books,  making  the  same 
promise.  They  were  first  issued  mainly  to  depositors,  but 
they  came  to  be  extensively  issued  during  the  pressure  of 
1834  in  discounting  paper.  The  General  Court  passed  a  law 
in  that  year  prohibiting  the  practice. 

The  organization  of  banks  in  Massachusetts  proceeded 
with  alarming  rapidity  during  this  period  of  speculation, 
and  at  the  end  of  1836,  seventy-eight  new  banks  had  been 
added  to  the  sixty-two  older  banks,  and  forty-three  of  the 
latter  had  obtained  an  increase  of  capital.  Several  banks 
succumbed  towards  the  close  of  the  year,  but  the  Boston  banks 
were  mainly  sound  and  followed  the  New  York  banks  reluc- 
tantly on  May  12,  1837,  in  the  suspension  of  specie  pay- 
ments. An  act  of  1809  imposed  a  penalty  of  two  per  cent. 
a  month  on  banks  which  failed  to  redeem  their  notes  in 
specie.  This  provision  was  not  enforced  in  1837,  an(^  the 
General  Court  suspended  it  until  January  i,  1839,  in  the  case 
of  banks  which  kept  their  circulation  within  seventy-five  per 
cent,  of  their  capital,  redeemed  notes  below  $5  in  Boston, 
and  below  $3  elsewhere,  and  complied  with  some  other  condi- 
tions. Voluntary  resumption  took  place  throughout  the  State 
on  August  13,  1838.  Failures  still  continued  among  the  mush- 
room institutions  which  had  been  created  during  the  period  of 
speculation,  and  thirty-two  Massachusetts  banks  wound  up 
their  affairs  between  1837  an(l  1844.  The  necessity  of  more 
efficient  supervision  by  the  State  was  made  plain  by  the 
crisis  of  1837,  and  three  bank  commissioners  were  authorized 
to  make  annual  examinations  of  all  the  banks  and  special 
examinations  when  they  thought  proper.  This  law  was 
repealed  after  five  years,  but  the  Massachusetts  banks  were 
now  upon  a  sound  basis  and  failures  were  few  during  the 
twenty-five  years  before  the  creation  of  the  national  system. 
Only  two  failures  occurred  between  1840  and  1855,  and  the 
notes  in  both  cases  were  paid  in  full. 

Most  of  the  bank  charters  were  renewed  for  twenty  years 


THE   STATE   BANKING  SYSTEMS.  363 

in  1831  and  expired  on  October  i,  1851.  The  renewal  in  the 
latter  year  was  made  the  occasion  of  several  changes  in  the 
banking  laws.  One  of  these  revived  the  board  of  bank 
commissioners  with  the  same  powers  of  examination  as  in 
1838.  Another  change  of  law  imposed  liability  upon  stock- 
holders for  the  redemption  of  notes,  in  case  of  failure,  to  the 
amount  of  their  stock,  without  the  former  limitation  in  re- 
gard to  mismanagement.  The  speculative  mania  which  pre- 
ceded the  crisis  of  1857  resulted  in  the  creation  of  fifty-eight 
new  banks  in  Massachusetts  with  a  capital  of  $14,400,000 
and  157  increases  in  the  capital  of  existing  banks,  amounting 
to  $18,745,000.  Several  failures  took  place,  but  the  note- 
holders suffered  little  loss  and  a  committee  of  the  legislature 
in  1856  reported  against  the  granting  of  further  charters. 
The  condition  of  the  State  banks  of  Massachusetts  in  1862, 
just  before  absorption  into  the  national  system,  showed  183 
banks  in  operation  with  a  capital  stock  of  $67,544,200  ;  circu- 
lation, $28,957,630  ;  deposits,  $44,737,490;  loans  and  dis- 
counts, $127,592,511  ;  and  specie,  $9,595>53O- 

The  banking  systems  of  the  other  New  England  States 
were  generally  based  upon  the  principle  of  issuing  notes 
against  assets  and  the  banks  maintained  close  relations  with 
those  of  Boston.  The  legislature  of  Maine  took  advantage 
of  the  expiration  of  a  number  of  charters  in  1846  to  adopt 
some  changes  of  law  to  afford  greater  security  for  circulating 
notes.  The  Act  of  August  10,  1846,  provided  that  for  the 
amount  of  circulation  issued  in  excess  of  fifty  per  cent,  of 
the  capital,  one  dollar  in  specie  should  be  kept  for  three  dol- 
lars in  bank-notes  and  that  the  total  circulation  should  never 
exceed  the  capital  plus  the  amount  of  specie  on  hand.  The 
State  of  Vermont  created  in  1831  a  safety  fund  modelled 
closely  upon  that  of  New  York.  Each  bank  thereafter  char- 
tered was  required  to  pay  into  the  State  Treasury,  in  six 
annual  instalments,  the  sum  of  four  and  a  half  per  cent, 
upon  the  amount  of  its  capital  stock,  and  in  case  the  fund 
was  reduced  by  the  failure  of  any  bank  it  was  to  be  restored 
by  assessments  by  the  State  Treasurer,  not  exceeding  three- 
fourths  of  one  per  cent,  in  any  one  year  upon  the  capital  of 


364         HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

the  banks.  An  act  was  passed  by  the  General  Assembly  in 
1842,  relieving  the  banks  from  contributions  to  the  safety 
fund  in  case  the  directors  should  execute  satisfactory  bonds 
to  redeem  according  to  law  all  bills  issued  and  to  pay  depos- 
its on  demand. 

The  banking  laws  of  Rhode  Island  were  peculiar  in  the 
facilities  which  they  extended  to  banks  for  recovering  debts. 
The  first  bank  charter, — issued  to  the  Providence  Bank  in 
1791,  and  creating  the  fifth  chartered  bank  then  existing  in 
the  United  States, — provided  that  upon  any  note  or  other 
instrument  expressly  made  payable  at  the  bank,  the  Presi- 
dent or  certain  of  the  directors  might  cause  a  demand  to  be 
made  upon  the  debtor,  in  case  of  his  failure  to  make  pay- 
ment at  maturity,  and  in  case  the  obligation  remained  un- 
paid for  ten  days,  these  officers  might  write  to  either  of  the 
clerks  of  the  courts  of  common  pleas  or  of  the  superior 
court  and  order  such  clerk  to  issue  a  writ  of  execution  capias 
satisfaciendum  fieri  facias,  and  attachment  of  real  estate 
upon  which  the  debt  and  costs  might  be  levied,  whereupon 
the  clerk  was  required  to  issue  such  an  execution,  to  be 
served  by  any  sheriff  or  deputy.  Subsequent  charters  did 
not  even  require  demand  in  writing  or  protest,  but  author- 
ized the  officers  of  the  bank  to  order  the  clerk  of  one  of  the 
courts  to  proceed  to  issue  the  execution.  This  drastic 
method  of  collecting  debts  under  the  ' '  bank  process  ' '  made 
banks  very  popular  investments  with  capitalists  and  ac- 
counted for  their  rapid  increase  up  to  1818.  An  act  was 
passed  forbidding  the  further  granting  of  such  charters,  but 
the  decision  of  * '  the  Dartmouth  College ' '  case  in  the 
Federal  courts,  denying  the  power  of  the  grantor  of  a  char- 
ter to  change  the  terms  except  with  the  consent  of  the 
grantee,  delayed  any  provision  for  withdrawing  the  pow- 
ers of  the  "bank  process"  from  banks  already  possessing 
them.  The  arbitrary  character  of  this  process  and  the  hard- 
ships it  inflicted  aroused  strong  popular  feeling  and  resulted 
in  an  act  of  1836  abolishing  the  privileges  of  "the  bank 
process  ' '  and  limiting  the  banks  thereafter  to  the  same  reme- 
dies as  individuals  for  the  collection  of  debts.  Sixty-one 


THE   STATE  BANKING  SYSTEMS.  365 

banks  then  existed  in  Rhode  Island,  of  which  thirty  pos- 
sessed the  powers  of  the  "bank  process." 

The  peculiar  feature  of  the  New  England  bank  circulation 
was  the  Suffolk  system  of  redemption,  which  was  established 
in  order  to  protect  sound  banking  currency  from  being  driven 
out  of  circulation  by  the  inferior  currency  of  other  States. 
The  suspension  of  specie  payments  south  and  west  of  New 
England  in  1814  resulted  in  the  introduction  of  depreciated 
notes  across  the  Connecticut  border  and  drove  the  Connec- 
ticut bank-notes  into  private  hoards  or  brought  them  to  the 
banks  for  redemption  in  specie.  The  banks  of  Maine  en- 
countered a  similar  situation  prior  to  the  suspension  of  specie 
payments  in  1837.  They  were  forbidden  by  law  to  issue 
notes  below  $5,  with  the  object  of  keeping  the  currency 
saturated  with  coin,  but  this  purpose  was  defeated  by  the 
circulation  of  the  small  notes  of  the  banks  of  neighboring 
States.  The  banks  of  Boston  found  themselves,  even  before 
the  close  of  the  last  century,  under  somewhat  the  same  com- 
petition from  the  country  banks  of  Massachusetts.  The 
Boston  banks  at  first  undertook  to  send  the  country  notes 
promptly  home  for  redemption,  but  the  banks  protested 
against  this  policy.  The  Boston  banks  then  refused  to  re- 
ceive the  country  notes  altogether.  The  result  was  the 
hoarding  of  "Boston  money,"  which  was  sold  at  a  small 
premium  to  persons  having  payments  to  make  at  the 
banks,  while  the  channels  of  circulation  were  filled  with  the 
country  notes,  which  were  known  as  "  foreign  "  or  "  current 
money." 

Several  attempts  were  made  in  Boston  to  establish  a 
redemption  office  for  sending  notes  home  for  redemption, 
but  it  was  not  until  1813  that  a  systematic  method  of  clear- 
ing and  redemption  for  bank-notes  was  put  in  operation  by 
the  New  England  Bank.  The  discount  on  the  notes  of 
' '  foreign ' '  banks  was  larger  than  the  actual  expense  of 
redemption  justified,  and  the  New  England  Bank  gave 
notice  that  it  would  charge  only  the  actual  cost  of  sending 
foreign  money  home  for  redemption  and  obtaining  the 
specie  for  it.  The  execution  of  their  plan  brought  down 


2 66         HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

the  discount  on  ' '  foreign  ' '  notes  from  four  or  five  per  cent, 
to  one  per  cent,  for  notes  of  Massachusetts  banks  and  some- 
what more  for  those  of  other  States. 

The  Suffolk  Bank  was  incorporated  in  Boston  in  1818  and 
the  directors  determined  to  give  special  attention  to  foreign 
exchanges.  A  committee  appointed  to  consider  the  subject 
in  1819  reported  that  it  was  expedient  "to  receive  at  the 
Suffolk  Bank  the  several  kinds  of  foreign  money  which  are 
now  received  at  the  New  England  Bank,  and  at  the  same 
rates."  They  recommended  that  if  any  bank  should  make 
a  permanent  deposit  of  $5000  with  the  Suffolk  Bank,  with 
such  further  sums  as  were  necessary  from  time  to  time  to 
redeem  its  bills  taken  by  the  Suffolk  Bank,  such  bank 
should  have  the  privilege  of  receiving  its  bills  at  the  same 
discount  at  which  they  were  purchased.  They  recommended 
that  the  banks  of  Providence  and  Newport  and  twenty-three 
others  keeping  an  account  with  the  Suffolk  have  the 
privilege  of  receiving  such  of  their  bills  as  were  received  by 
the  Suffolk  bank  at  the  same  discount  as  taken,  without  the 
permanent  deposit  of  $5000,  provided  these  banks  would 
make  all  their  deposits  at  the  Suffolk  Bank  and  at  all  times 
have  money  to  redeem  the  bills  taken.  J  The  policy  to  be 
adopted  towards  banks  refusing  to  make  a  deposit  was  to 
send  their  notes  home  for  redemption.  These  recommenda- 
tions were  put  in  force  and  the  lively  competition  of  the 
Suffolk  with  the  New  England  Bank  soon  forced  exchange 
on  Massachusetts  notes  to  one-half  of  one  per  cent.,  or 
even  less. 

The  notes  of  the  Boston  banks  were  still  crowded  out  of 
circulation  by  the  slight  discount  on  the  notes  of  the  country 
banks  and  it  was  found  in  1824  that  the  permanent  circula- 
tion of  the  eleven  city  banks,  with  a  capital  of  $i  1,150, coo, 
was  not  more  than  $300,000,  while  the  country  banks,  with 
a  capital  of  less  than  $9,000,000,  had  a  circulation  of 
$7,500,000.  An  agreement  was  made  between  the  Suffolk 
and  six  other  Boston  banks  by  which  a  fund  of  $300,000  in 
their  notes  was  furnished  the  Suffolk,  to  be  paid  out  in 

1  Whitney,  7-8. 


THE  STATE  BANKING  SYSTEMS.  367 

equal  proportions  in  the  purchase  of  country  bank-notes.  1 
The  tendency  of  this  policy  was  to  force  the  city  notes  into 
circulation  and  withdraw  the  country  notes  unless  they 
were  maintained  absolutely  at  par  by  the  action  of  the 
country  banks.  The  plan  was  vigorously  resisted  at  first 
by  the  country  banks  and  the  Boston  association  was 
decorated  with  such  opprobrious  names  as  the  ' '  Holy 
Alliance"  and  "  Six-  tailed  Bashaw."  The  country  banks 
were  forced  to  yield,  however,  and  most  of  them  consented 
to  make  the  permanent  deposit  of  $2000  which  was  now 
required,  in  addition  to  a  sufficient  sum  for  current  redemp- 
tions. The  notes  of  those  maintaining  their  redemption 
fund  were  received  at  par  and  were  charged  up  against  them 
once  a  week  or  as  often  as  might  be  convenient.  The  Suf- 
folk Bank  charged  interest  whenever  the  amount  redeemed 
exceeded  the  funds  to  the  credit  of  the  issuing  bank,  but 
received  the  notes  of  all  banks  in  good  standing  and  placed 
them  to  the  credit  of  the  bank  sending  them  in. 

A  sort  of  clearing  house  was  thus  established  which 
enabled  the  issues  of  one  bank  to  be  set  off  against  those  of 
another  in  making  settlements.  The  effect  of  restoring  the 
country  notes  to  par  was  to  reduce  the  circulation  of  sixteen 
Massachusetts  banks  within  six  months  by  $382,781  and  to 
increase  the  circulation  of  the  Boston  banks  by  $283,497. 
When  any  bank  refused  to  join  the  Suffolk  system,  the 
Suffolk  Bank  simply  presented  its  notes  for  redemption. 
This  course  soon  convinced  the  majority  of  the  country 
banks  that  it  was  better  to  clear  through  the  Stfffolk  Bank 
than  to  maintain  an  unequal  competition  with  neighboring 
banks,  which  had  the  prestige  of  belonging  to  the  Suffolk 
system  and  whose  notes  were  at  par  throughout  New  Eng- 
land. The  suspension  of  specie  payments  in  1837  Put  an 
end  to  enforced  redemption  for  a  time,  but  the  majority  of 
the  banks  continued  to  settle  their  balances  through  the 
Suffolk  Bank  and  their  bills  passed  current  all  over  the 

1  John  Amory  Lowell,  who  served  on  the  "  Foreign  Money  Com- 
mittee" for  forty-two  years,  and  William  Lawrence,  prepared  this 
plan  and  report. 


368       HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

Union,  while  those  of  the  other  banks  had  only  a  local 
circulation.  * 

A  branch  redemption  agency  was  established  in  Rhode 
Island,  by  which  the  Merchants'  Bank  of  Providence  received 
at  par  from  the  Rhode  Island  banks  the  bills  of  all  other 
banks  in  New  England  and  settled  balances  as  far  as 
possible  among  the  Rhode  Island  banks.  Bills  issued  by 
banks  outside  of  Rhode  Island  were  sent  to  Boston,  and 
Rhode  Island  bills  were  sent  in  bulk  by  the  Suffolk  Bank  to 
Providence.  Legal  encouragement  was  given  to  the  Suffolk 
system  in  Vermont  by  the  Act  of  1842,  which  levied  a  tax 
of  one  per  cent,  upon  bank  capital,  but  remitted  the  tax  to 
any  bank  which  should  ' '  keep  a  sufficient  deposit  of  funds 
in  the  City  of  Boston,  and  should  at  that  city  uniformly 
cause  its  bills  to  be  redeemed  at  par. ' '  All  but  three  of 
the  Vermont  banks  were  members  of  the  system  before  1848 
and  in  1850  all  had  joined.  Several  of  the  Maine  banks 
resisted  for  a  time  and  received  the  support  of  the  bank 
commissioners  in  1837,  but  their  circulation  became  limited 
to  their  immediate  locality  and  the  system  was  commended 
by  the  commissioners  in  later  reports. 

The  handsome  profits  derived  by  the  Suffolk  Bank  from 
the  redemption  system  led  to  several  efforts  to  establish  a 
rival  institution.  The  work  of  the  Suffolk  Bank  was  so  well 
done  that  it  was  not  until  1855  that  these  efforts  bore  tangible 
fruit.  The  Bank  of  Mutual  Redemption  was  then  estab- 
lished for  the  specific  purpose  of  redeeming  the  currency  of 
the  New  England  banks  at  par.  The  bank  went  into  opera- 
tion in  1858,  with  135  New  England  banks  interested  as 
stockholders  and  thirty-five  keeping  a  permanent  deposit 
aggregating  $143,000.  The  bank  was  admitted  to  the 
clearing  house  after  a  struggle  and  most  of  the  country 


1  "At  the  time  when  the  Suffolk  system  was  at  its  best  I  lived  in 
Chicago.  The  notes  of  Massachusetts  banks  were  in  great  request 
there.  They  were  considered  the  best  currency  going  and  they  bore 
a  premium  over  the  notes  of  Illinois  and  Wisconsin  banks."  Testi- 
mony of  Horace  White  before  House  Committee  on  Banking,  House 
Report  1508,  53d  Cong.,  3d  Sess.,  84. 


THE   STATE  BANKING  SYSTEMS.  369 

banks  withdrew  from  the  Suffolk  and  transferred  their  de- 
posits to  the  Bank  of  Mutual  Redemption.  There  was  some 
friction  between  the  two  institutions  and  it  was  feared  in 
some  quarters  that  the  entire  system  would  be  endangered, 
but  a  mutual  exchange  of  the  notes  of  their  patrons  was 
arranged  between  the  two  banks.  The  Suffolk  Bank  with- 
drew from  the  system  on  November  i,  1858,  upon  the  ground 
that  "  its  main  feature,  the  right  to  send  home  bills  for  specie, 
cannot  be  given  up  without  destroying  its  efficacy,"  and 
that  "  under  the  existing  circumstances  the  bank  does  not 
wish  to  stand  in  the  way  of  a  trial  of  the  attempted  experi- 
ment of  a  foreign  money  system  to  be  conducted  on  less 
stringent  principles."  The  Suffolk  Bank  continued  to 
receive  country  money  at  a  discount  of  twenty-five  cents 
per  $1000  and  to  share  to  this  degree  in  the  business  of 
redemption. 

The  circulation  of  the  New  Kngland  banks  in  1858  was  less 
than  $40, 000,000  and  the  redemptions  for  that  year  through 
the  Suffolk  Bank  were  $400,000,000.  Every  note,  therefore,  on 
the  average,  passed  through  the  redemption  agency  ten  times  a 
year,  or  a  little  less  often  than  once  a  month.  This  frequency 
of  redemptions  not  only  tested  the  solvency  of  the  banks  by 
the  ultimate  test  of  a  banking  currency,  but  it  kept  the  cir- 
culation constantly  adjusted  to  business  conditions.  The 
redemptions  through  the  Suffolk  agency  were  $76,248,000 
in  1834  and  increased  to  $105,457,000  in  1837.  There  were 
fluctuations  during  the  period  of  specie  suspension,  but  the 
redemptions  increased  progressively  to  $137,000,000  in  1845, 
$220,000,000  in  1850  and  $341,000,000  in  1855,  until  they 
reached  their  maximum  of  $400,000,000  in  1858.  The  ex- 
penses of  carrying  on  the  redemption  agency  reached  a 
maximum  of  $40,000  in  1858,  making  an  average  expense 
of  ten  cents  per  $1000.  The  suspension  of  specie  payments 
by  the  banks  of  the  country  at  the  close  of  1861,  as  the  re- 
sult of  Secretary  Chase's  issue  of  government  demand  notes, 
arrested  the  regularity  of  redemptions  through  the  Suffolk 
system  and  it  was  superseded  before  resumption  by  the 

National  banking  system.     The  Suffolk  system  was  never 
24 


370         HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

sustained  by  formal  law,  but  it  maintained  New  England 
bank  currency  for  a  generation  at  par  with  gold  and  pre- 
vented any  losses  to  note-holders  larger  than  a  fraction  of 
one  per  cent,  of  the  entire  volume  of  circulation. 

New  York  tried  two  banking  systems  under  which  many 
strong  banks  were  created,  but  both  of  which  failed  in  some 
degree  through  defects  of  detail.  The  early  New  York 
banks  issued  notes  against  their  general  assets  and  were 
chartered  under  special  acts  of  the  legislature,  which  were 
granted  to  some  extent  as  political  favors.  The  Bank  of 
New  York  was  incorporated  by  Act  of  March  21,  1791,  after 
having  done  business  for  seven  years  under  articles  of  associ- 
ation drawn  by  Alexander  Hamilton.  This  bank  retained 
a  practical  monopoly  in  New  York  City  until  1799,  when 
the  Manhattan  Company  began  a  banking  business  with  a 
capital  of  $2,000,000.  The  charter  was  obtained  by  the 
management  of  Aaron  Burr  and  would  undoubtedly  have 
been  refused  by  the  Federalist  majority  in  the  legislature 
if  it  had  been  clearly  understood  that  it  carried  banking 
powers  ;  but  the  charter  was  granted  for  the  avowed  purpose 
of  supplying  the  City  of  New  York  with  pure  water  and 
cloaked  the  banking  power  under  a  general  provision  per- 
mitting the  company  to  employ  its  surplus  in  any  moneyed 
transactions  not  inconsistent  with  the  laws  of  the  State.1 
Six  additional  banks  were  chartered  up  to  1811  ;  nine  ad- 
ditional in  that  and  the  following  year,  after  the  lapse  of  the 
charter  of  the  Bank  of  the  United  States ;  and  twenty-four 
more  from  1813  to  1825. 

Thirty  New  York  bank  charters  were  to  expire  between 
1829  and  1833,  and  Governor  Van  Buren  in  the  former  year 
urged  upon  the  legislature  a  sweeping  measure  of  reform. 
He  presented  what  is  known  as  "the  safety-fund  plan," 
which  he  stated  had  been  presented  to  him  by  Mr.  Joshua 
Forman  of  Syracuse.  Mr.  Forman  declared  that  ' '  The 
propriety  of  making  the  banks  liable  for  each  other  was 
suggested  by  the  regulations  of  the  Hong  merchants  in 
Canton,  where  a  number  of  men,  each  acting  separately, 

1  Roberts,  477. 


THE  STATE  BANKING  SYSTEMS.  371 

have,  by  a  grant  of  the  government,  the  exclusive  right  of 
trading  with  foreigners  and  are  all  made  liable  for  the  debts 
of  each  in  case  of  failure."  Mr.  Forman  did  not  propose 
to  extend  this  principle  further  than  the  guarantee  of  the 
circulating  notes,  but  by  accident  or  design  the  bill  which 
passed  the  legislature  made  the  safety  fund  liable  for  all  the 
debts  of  a  failed  bank.  Each  bank  was  required  to  pay 
annually  to  the  Treasurer  of  the  State  a  sum  equal  to  one- 
half  of  one  per  cent,  of  its  capital  stock  until  the  payments 
should  amount  to  three  per  cent.  The  first  act,  approved 
April  2,  1829,  provided  for  the  distribution  of  the  assets  of 
a  failed  bank  in  the  usual  way  and  that,  after  all  the  assets 
had  been  turned  into  money  and  the  final  distribution  made, 
a  court  of  chancery  should  enter  an  order  showing  the 
amount  necessary  to  discharge  the  remaining  debts  and 
should  authorize  the  Comptroller  to  pay  the  amount  from 
the  bank  fund.  This  law  was  modified  by  the  Act  of  May  8, 
1837,  to  enable  the  State  authorities  to  take  such  measures 
as  might  be  necessary  for  the  immediate  payment  of  the 
notes  of  any  insolvent  bank  whose  liabilities  in  excess  of 
assets  should  not  exceed  two-thirds  of  the  bank  fundf  It 
was  not  until  1842,  after  the  failure  of  nine  of  the  banks 
incorporated  under  the  safety  fund  system,  that  an  act  was 
passed  making  the  circulating  notes  only  a  charge  against 
the  safety  fund  and  leaving  the  other  liabilities  of  the  failed 
bank  to  be  paid  from  the  assets. 

The  panic  of  1837  put  the  safety  fund  to  its  first  test  and 
compelled  the  State  Comptroller  to  make  heavy  payments 
in  the  redemption  of  circulating  notes.  Three  important 
banks  in  Buffalo  failed  early  in  May,  1837,  with  a  reported 
circulation  of  $413,961.  The  Comptroller  announced  that 
their  bills  would  be  received  in  payment  of  canal  tolls  and 
other  debts  to  the  State  and  they  were  maintained  substan- 
tially at  par.  The  charters  of  two  banks  were  repealed  by 
the  legislature  in  1837  and  their  notes  redeemed  by  the 
State,  but  one  of  these  charters  was  renewed  and  the  pay- 
ments from  the  safety  fund  were  reimbursed.  The  safety 
fund  was  practically  intact  in  1840  and  stood  at  $870,615. 


372         HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

The  next  three  years  witnessed  eleven  failures,  which  prac- 
tically wiped  out  the  safety  fund  and  compelled  calls  upon 
the  solvent  banks  to  make  it  good.  The  redemption  of 
notes  was  suspended  after  the  first  four  failures,  because  the 
fund  was  deemed  no  more  than  sufficient  to  cover  their 
liabilities,  but  the  Act  of  1 842  permitted  the  banks  to  antici- 
pate their  annual  contributions  by  as  much  as  six  years  in 
some  cases  and  to  pay  into  the  fund  at  par  the  notes  of  the 
failed  banks.  The  banks  very  generally  took  advantage  of 
this  provision  and  made  a  good  profit  on  notes  of  the  failed 
banks  which  had  fallen  into  their  hands  at  a  considerable 
discount.  Their  advance  payments  did  not  involve  a  loss 
of  interest,  as  the  original  law  required  the  investment  of 
the  bank  fund  and  the  payment  of  interest  to  the  banks, 
and  the  Act  of  1842  granted  seven  per  cent,  interest  on  the 
advance  payments.  Redemptions  of  notes  up  to  September 
30,  1850,  were  $i, 614, 577  and  payments  to  other  creditors 
up  to  1851  were  $1,088,109. 

The  failure  of  the  L,ewis  County  Bank  in  November,  1854, 
with  deposits  of  only  $1,998  and  outstanding  notes  for  $148,- 
545,  found  the  safety  fund  no  longer  adequate  to  redeem 
circulation.  Future  contributions  up  to  1860  were  pledged 
for  the  redemption  of  the  public  stocks  which  had  been 
issued  to  obtain  ready  money  to  provide  for  previous  failures. 
The  notes  of  the  Lewis  County  Bank  were  finally  redeemed 
twelve  years  later  and  the  notes  of  the  three  banks  which 
failed  in  1857  were  provided  for  out  of  their  assets.  The 
total  contributions  to  the  safety  fund  from  its  creation  to  the 
abolition  of  the  system  were  $3,104,999. 

The  safety  fund  system  broke  down  primarily  because 
the  fund  was  made  to  cover  all  liabilities  instead  of  simply 
the  liability  for  note  issues!  The  fact  that  another  system 
was  adopted  for  banks  organized  after  1838  also  operated  to 
the  injury  of  the  safety  fund  system,  because  no  new  banks 
became  contributors  and  the  failure  and  withdrawal  of  some 
of  the  old  ones  gradually  reduced  the  number  over  whose 
resources  the  liability  was  distributed.  Another  evil  by 
no  means  inherent  in  the  safety  fund  system,  but  which 


THE   STATE  BANKING  SYSTEMS.  373 

increased  the  demand  upon  it,  was  the  issue  of  notes  by 
several  of  the  safety  fund  banks  in  excess  of  the  maximum 
allowed  by  law.  This  defect  was  remedied  in  1843  by  an 
act  providing  for  the  issue  of  notes  registered  and  counter- 
signed by  the  Comptroller  and  the  surrender  of  the  plates 
with  which  the  banks  were  then  printing  their  notes.  A 
mistake  was  made  also  in  basing  the  contributions  of  the 
banks  to  the  safety  fund  upon  their  capital  rather  than 
upon  their  outstanding  circulation.  But  the  arrest  of  the 
expansion  of  the  system,  the  over-issue  of  notes  in  viola- 
tion of  law,  and  the  distribution  of  the  assessment  in  pro- 
portion to  capital,  would  not  have  prevented  the  success  of 
the  safety  fund  system  if  the  fund  had  been  maintained 
exclusively  for  the  redemption  of  circulating  notes.  The 
fund  would  have  amply  secured  the  notes  of  the  New  York 
banks  and  ensured  their  prompt  redemption  at  par,  even 
without  the  reduplicated  security  afforded  by  the  constitu- 
tion of  1846,  which  made  the  notes  a  first  lien  on  the  assets 
and  made  stockholders  liable,  to  the  amount  of  their  stock, 
for  the  debts  of  a  failed  bank  contracted  after  January  i, 
1850.  A  careful  estimate  shows  that  the  annual  assessment 
required  on  the  average  from  1829  to  1865  to  keep  the  fund 
good  and  redeem  every  dollar  of  the  circulation  of  suspended 
banks  would  have  been  less  than  one-fourth  of  one  per  cent. 
of  the  banking  capital,  or  about  three-eighths  of  one  per  cent. 
on  the  average  outstanding  circulation.1 

Bank  charters  continued  to  be  granted  in  New  York  by 
special  acts  and  to  be  subject  to  political  favor  after  the 
adoption  of  the  safety  fund  plan  and  up  to  1838.  A  cam- 
paign for  free  banking,  —  in  the  sense  of  equal  right  to  all 
persons  complying  with  fixed  conditions,  —  was  waged  by 


New  York  Bank  Currency,  "  Sound  Currency,"  Vol.  II., 
No.  5,  p.  15.  Millard  Fillmore,  who  was  Comptroller  of  the  State  in 
1848,  showed  that  up  to  that  time,  covering  the  period  of  the  most 
numerous  failures,  the  contributi«ns  to  the  safety  fund  had  been 
$1,876,063  and  the  outstanding  circulation  of  the  failed  banks  $1,548,- 
558,  leaving  a  surplus  of  $327,505,  if  the  fund  had  been  used  simply 
to  guarantee  circulation. 


374        '  HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

the  lyOco-Foco  Democrats  for  several  years  and  bore  fruit  in 
the  Free  Banking  Act  of  April  18,  1838.  Individuals  or 
associations  were  authorized  by  this  act  to  engage  in  the 
issue  of  notes,  which  were  to  be  delivered  to  them  by  the 
State  Comptroller,  upon  depositing  with  him  the  stocks  of 
the  United  States,  of  the  State  of  New  York,  or  of  any 
other  State  approved  by  the  Comptroller,  made  equal  to  a 
five  per  cent.  New  York  stock.  Provision  was  also  made 
for  issuing  notes  on  bonds  and  mortgages  on  improved,  pro- 
ductive and  unincumbered  real  estate  worth  double  the 
amount  secured  by  the  mortgage,  and  the  notes  were  to 
show  whether  they  were  secured  by  stocks  or  by  mortgages. 
The  mortgage  feature  of  the  law  opened  the  door  to  a  paper 
money  Saturnalia  as  dangerous  as  the  issues  of  L,aw's  Bank, 
the  assignats  of  the  National  Assembly,  or  the  L,and  Bank 
of  Norway  ;  but  fortunately  the  conditions  attached  to  the 
issue  of  notes  for  mortgages  were  somewhat  severe  and  such 
issues  never  attained  any  considerable  proportion  of  the 
aggregate  circulation  of  the  free  banks.  The  provision  for 
mortgages  as  a  basis  for  circulation  was  repealed  in  1863 
and  securities  for  note  issues  were  restricted  solely  to  stocks 
of  the  State  of  New  York  and  of  the  United  States. 

Individuals  as  well  as  associations  were  prompt  to  take 
advantages  of  the  free  banking  law  and  the  amount  of  capi- 
tal subscribed  by  January  i,  1839,  was  $10,838,175.  The 
actual  circulation  under  the  law  at  that  time  was  only 
$396,300,  but  the  circulation  had  increased  by  December 
i,  1839,  to  about  $6,000,000,  issued  by  seventy-six  persons 
or  associations,  with  fifty-seven  additional  applications 
pending.  Eight  of  these  banks  went  out  of  business 
before  January  i,  1841,  and  eighteen  more  followed  in  the 
course  of  the  next  year.  The  notes  were  redeemed  at  an 
average  discount  of  twenty  per  cent,  for  those  secured  by 
stocks  and  twenty-five  per  cent,  for  those  secured  by  stock 
and  real  estate.  The  results  of  the  sales  of  securities  up 
to  the  close  of  1850  showed  aggregate  receipts  of  $1,142,758 
upon  stocks  which  had  been  accepted  as  security  for  circula- 
tion to  the  amount  of  $1,468,245.  This  afforded  a  dividend 


THE  STATE  BANKING  SYSTEMS.  375 

of  about  77  per  cent,  upon  the  circulation  thus  redeemed. 
The  New  York  stocks  sold  on  the  average  for  92.8.6  per 
cent.  ;  Michigan  stocks  came  next  at  72.95  per  cent. ;  Indiana 
bringing  up  the  rear  at  49.08  per  cent. 

The  fact  that  individuals  could  issue  notes  under  the  free 
banking  law  upon  the  deposit  of  securities  led  to  many  vi- 
sionary efforts  to  exploit  credit  and  resulted  in  1844  in  legis- 
lation requiring  an  individual  banker  to  deposit  securities  to 
the  amount  of  not  less  than  $50,000  and  to  transact  business 
in  the  place  in  which  he  resided.  A  market  was  created  in 
New  York  for  a  time  for  securities  which  did  not  find  a 
ready  sale  elsewhere  and  quotations  for  such  securities  were 
strengthened,  but  this  market  was  destroyed  by  the  Act  of 
1840,  limiting  the  securities  thereafter  accepted  to  those  of 
New  York.  Such  changes  gradually  strengthened  the  sys- 
tem until  there  was  little  to  be  desired  on  the  single  ground 
of  security.  The  failures  during  the  first  twelve  years  of 
the  free  banking  system  showed  losses  of  $326,000,  or  only 
$27,200  per  year  on  an  average  circulation  of  about  $6,000,- 
ooo.  This  was  less  than  one-half  of  one  per  cent,  per  year 
and  the  losses  in  the  remaining  fifteen  years  of  the  operation 
of  the  system  averaged  only  $4800  per  year  on  a  circulation 
of  about  $22,000,000,  or  less  than  one-fortieth  of  one  per 
cent.  The  circulation  issued  under  the  free  banking  law 
was  not  a  strong  reliance,  however,  in  times  of  pressure  and 
was  threatened  at  such  times,  when  strength  was  most 
needed,  by  the  decline  in  securities.  It  had  little  elasticity 
and  did  not  meet  the  demands  of  the  business  community  in 
this  respect  nearly  so  well  as  the  circulation  of  the  safety 
fund  banks.  Defects  of  detail  were  gradually  eliminated, 
however,  and  the  system  was  successful  enough  to  attract 
attention  in  Canada  in  1850  and  to  become  the  model  of  the 
national  banking  system  of  the  United  States  in  1863. 

The  banking  laws  of  New  York  were  followed  also  in 
many  Western  States,  but  not  always  closely  enough  to 
assure  the  later  systems  the  solidity  of  the  original.  The 
State  Bank  of  Ohio,  created  in  1845,  was  one  of  the  best  of 
these  institutions  and  its  note  issues  were  protected  by  a 


376          HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

combination  of  the  safety  fund  and  security  principles.  The 
bank  was  not,  as  its  name  might  imply,  an  institution  of 
State,  but  was  owned  entirely  by  individuals  and  acted  as  a 
sort  of  board  of  control  for  the  branch  banks.  Each  branch 
was  required  to  deposit  with  the  board  of  control  ten  per 
cent,  of  the  amount  of  its  circulating  notes,  either  in  specie 
or  in  the  bonds  of  the  State  or  the  United  States,  as  a  safety 
fund  for  the  protection  of  the  entire  note  issues  of  the  bank. 
Each  branch  was  liable  for  the  circulation,  but  not  for  the 
other  liabilities,  of  the  other  branches.  The  reimbursement 
of  the  safety  fund  for  notes  redeemed  was  constituted  the 
first  lien  on  the  assets  of  a  failed  branch.  The  State  Bank 
of  Ohio  was  eminently  successful  and  was  managed  in  much 
the  same  way  as  the  State  Bank  of  Indiana.  The  aggregate 
capital  of  the  thirty-six  branches  in  1863  was  $4,054,700  ; 
circulation,  $7,246,513;  loans  and  discounts,  $8,653,459; 
deposits,  $5,631,629  ;  and  specie,  $2,216,982. 

The  State  of  Michigan  enacted  a  safety-fund  law  in  1836, 
but  it  was  forgotten  and  ignored  in  the  phrensy  of  paper  in- 
flation which  swept  over  the  State  during  the  next  few 
years.  The  first  session  of  the  State  legislature  in  1837 
passed  a  general  banking  law,  which  was  followed  up  after 
the  panic  in  the  same  j^ear  by  an  act  permitting  new  banks 
to  begin  business  in  a  condition  of  suspension  of  specie  pay- 
ments. Thirty  per  cent,  of  the  capital  was  required  to  be 
paid  in  specie,  but  this  provision  was  evaded  by  borrowing 
specie  for  a  few  days  when  the  bank  commissioners  made 
their  tours  of  inspection.  Any  twelve  free-holders  could 
form  a  bank  if  they  were  able  to  show  a  capital  of  $50,000, 
including  thirty  per  cent,  in  specie  and  the  remainder  in 
bonds  and  mortgages  approved  by  the  Auditor  General  of 
the  State.1  The  restraints  of  the  law  were  so  recklessly 
violated  that  the  State  was  soon  flooded  with  $1,000,000  in 
worthless  bills.  Banks  were  created  after  specie  resumption 
in  the  most  inaccessible  places,  that  their  notes  might  rot  be 
presented  for  redemption  ;  and  Eastern  speculators  took  out 


Felch,  Senate  Ex.  Doc.  38,  52d  Cong.,  2d  Sess.,  76. 


THE   STATE  BANKING  SYSTEMS.  377 

Michigan  charters  and  issued  the  bills  in  other  States  where 
the  standing  of  the  banks  could  not  be  known.  "  They 
were  at  a  great  discount,"  says  Judge  Cooley,  "  as  compared 
with  Eastern  bills  ;  the  issues  of  one  bank  were  at  a  dis- 
count as  compared  with  those  of  another ;  merchants  kept 
couriers  by  whom  they  hurried  off  to  the  banks  of  issue  the 
bills  they  were  compelled  to  take,  that  they  might  if  possi- 
ble exchange  them  for  something  in  which  they  had  more 
confidence.  No  '  circulating  medium  '  ever  before  circulated 
so  rapidly."  Fraudulent  over- issues  were  frequent  and  in 
many  cases  were  not  even  recorded.  Misery  and  bankruptcy 
spread  over  the  State,  with  their  natural  sequence  of  stay 
laws  and  laws  fixing  the  value  at  which  the  property  of 
debtors  should  be  taken.  The  free  banks  were  nearly  all  in 
the  hands  of  receivers  when,  in  1844,  the  Supreme  Court  of 
the  State  decided  that  even  the  receiverships  had  no  legal 
existence,  for  the  general  banking  act  had  been  passed  in 
violation  of  the  constitutional  provision  regarding  corpora- 
tions, which  implied  the  necessity  of  a  separate  charter  in 
each  case. 

Banking  laws  basing  the  issue  of  notes  upon  securities 
were  adopted  by  Illinois  in  1851,  Indiana  in  1852,  Wisconsin 
in  1853,  and  other  States  soon  after.  The  restrictions  which 
experience  in  New  York  showed  to  be  necessary  to  protect 
note-holders  received  little  attention  in  the  West  and  the 
rapid  depreciation  of  the  ' '  red  dog  ' '  and  ' '  wildcat ' '  cur- 
rency cast  a  suspicion  upon  State  bank  issues  which  has 
survived  to  this  day.  Fifty-one  of  the  ninety-four  free 
banks  of  Indiana  suspended  before  the  panic  of  1857  and 
most  of  those  left  tumbled  like  a  house  of  cards  in  all  the 
States  when  the  pressure  came.  A  fictitious  market  was 
created  for  securities,  which  brought  prices  that  could  not 
have  been  otherwise  obtained,  and  the  stimulus  was  thus 
given  for  the  creation  of  public  debt  by  the  issue  of  securities, 
the  issue  of  bank-notes  on  the  securities,  the  purchase  of 
more  securities  to  be  used  as  the  pledge  of  new  bank-notes, 


Michigan,  272. 


378         HlSl^ORY  OF  MODERN  BANKS  OF  ISSUE. 

and  so  on  in  an  endless  chain  of  debt  creation  and  the  infla- 
tion of  paper  wealth.  It  was  usually  found  when  a  bank 
failed  that  the  securities  could  not  be  marketed  for  their 
face  value  and  in  many  cases  that  there  were  no  other  avail- 
able assets.  The  Bank  Comptroller  of  Wisconsin  reported 
as  late  as  1863  a  list  of  fifteen  failed  banks  whose  notes  he 
was  redeeming  at  rates  ranging  from  sixty  cents  to  ninety- 
five  and  a  half  cents  on  the  dollar.1  The  basis  of  redemp- 
tion, however,  was  not  coin,  but  United  States  Treasury 
notes,  themselves  depreciated  about  thirty  per  cent.,  so  that 
it  was  necessary  to  multiply  the  one  depreciation  into  the 
other  to  obtain  the  scanty  proceeds  in  coin  of  Wisconsin 
notes  based  upon  "securities."  Free  banking  laws  were 
passed  in  eastern  States,  but  the  system  made  little  headway 
in  those  States  against  the  established  credit  of  the  chartered 
banks. 

One  of  the  most  dismal  chapters  in  American  banking 
history  is  that  which  records  the  creation  and  collapse  of 
banks  owned  and  managed  by  the  States.  The  Federal 
Constitution  sought  to  close  the  door  against  issues  of  the 
legal  tender  paper  money,  which  had  worked  such  havoc 
with  prices  and  credit  during  the  Revolutionary  era,  by  the 
decree  that  no  State  should  "emit  bills  of  credit."  The 
Supreme  Court  sustained  the  force  of  this  prohibition  in  the 
case  of  Craig  vs.  the  State  of  Missouri  (4  Peters,  410),  and 
decided  that  the  certificates  issued  by  the  State  and  made 
receivable  for  salaries  and  taxes,  even  though  not  full  legal 
tender,  fell  under  the  ban  of  the  constitutional  restriction. 
A  different  spirit  ruled  the  court  when  the  case  of  Brisco  vs. 
the  Bank  of  the  Commonwealth  of  Kentucky  was  decided 
in  1837.  Chief-Justice  Marshall  had  just  died,  but  Justice 
Story,  who  dissented  from  the  majority  decision,  insisted 
that  his  dead  associate  had  agreed  with  him,  that  the  pend- 
ing case  could  not  be  distinguished  in  principle  from  that  of 
Craig  vs.  Missouri.  The  majority  found  a  distinction  in  the 
fact  that  the  bills  in  question  were  issued  by  a  bank  under 

1  Report  of  the  Secretary  of  the  Treasury  on  Condition  of  the  Banks 
at  the  Commencement  0/1863,  204- 


THE   STATE  BANKING  SYSTEMS.  379 

the  direction  of  a  president  and  twelve  directors.  They  held, 
notwithstanding  the  fact  that  the  bank  was  exclusively  the 
property  of  the  State,  that  the  notes  were  not  ' '  bills  of 
credit  "  within  their  definition,  which  included  only  "  paper 
issued  by  the  authority  of  a  State  on  the  faith  of  the  State, 
and  designed  to  circulate  as  money."  ] 

The  mania  for  banks  of  State  was  already  well  on  its 
course  before  this  decision  was  made.  The  Commonwealth 
of  Kentucky  had  been  part  owner  in  the  Bank  of  Kentucky, 
incorporated  in  1806,  and  owned  $586,400  of  the  capital 
stock  of  $2,726,100  when  the  charter  was  repealed  in  1822. 
The  Bank  of  Kentucky  was  hampered  throughout  its  career 
by  State  interference,  but  was  paying  specie  and  its  stock 
was  at  par  when  the  State  decided  to  set  up  a  rival  under  its 
own  exclusive  ownership  and  management.  The  new-comer 
was  the  Bank  of  the  Commonwealth  of  Kentucky,  chartered 
for  twenty  years  by  the  Act  of  November  29,  1820,  with  a 
capital  of  $2,000,000,  which  was  increased  December  22, 
1820,  to  $3,000,000.  The  State  availed  itself  of  the  power 
to  appoint  additional  directors  in  the  old  bank  to  pack  the 
board  with  pliant  tools,  who  soon  effected  its  ruin  for  the 
benefit  of  the  new  institution.  The  Bank  of  the  Common- 
wealth, however,  was  a  pitiable  failure.  Its  notes  had  fallen 
on  March  22,  1822,  to  sixty-two  and  a  half  cents  on  the  dol- 
lar and  they  continued  to  fall  until  the  entire  State  was 
embroiled  in  a  legal  controversy  which  almost  ended  in 

1  Brisco  vs.  Bank  of  Kentucky  is  reported  in  n  Peters,  257.  Prof. 
Sumner  declares  that  by  this  decision  "wildcat  banking  was  granted 
standing  ground  under  the  Constitution  "  and  that  "the  decisions  of 
the  Supreme  Court  on  the  constitutionality  of  the  Legal  Tender  Act 
must  have  borne  an  entirely  different  color,  if  Marshall's  opinion  had 
prevailed  in  Brisco's  case."— Andrew  Jackson,  363.  Judge  Story  went 
so  far,  in  his  Commentaries  on  the  Constitution,  as  to  intimate  that 
if  the  question  were  a  new  one,  it  would  be  doubtful  if  the  States 
had  power  under  the  Constitution  to  incorporate  banks  of  issue  ;  but 
it  is  obvious  that  the  permission  to  issue  notes,  circulating,  like  other 
commercial  paper,  upon  private  credit,  is  very  different  from  the 
issue  under  public  authority  of  legal  tender  money. — Kent,  Commen- 
taries, I.,  408. 


380         HISTORY  OF  MODERN"  BANKS  OF  ISSUE. 

revolution.  The  hard  times  of  1818  had  resulted  in  the 
charter  of  forty-six  banks  with  a  total  capital  of  $8, 720,000, 
but  the  demand  for  specie  by  the  United  States  Bank  drove 
them  to  the  wall  and  the  State  was  left  without  solvent 
banks.  A  more  permanent  legacy  of  the  hard  times  was  a 
replevin  law,  passed  in  1820,  which  gave  debtors  two  years 
within  which  to  redeem  their  goods  unless  payment  was  ac- 
cepted by  creditors  in  notes  of  the  Bank  of  the  Commonwealth. 

"The  relief  laws,"  of  which  the  replevin  law  was  one, 
became  the  political  issue  of  the  hour.  Judge  Clarke,  of  the 
Clarke  County  District  Court,  declared  one  of  the  provisions 
of  the  replevin  law  unconstitutional,  as  impairing  the  obli- 
gation of  existing  contracts.  The  Appellate  Court  sustained 
Judge  Clarke,  in  spite  of  an  effort  to  remove  him  by  an  ex- 
tra session  of  the  legislature,  but  the  relief  party  swept  the 
State  in  the  elections  of  1824,  repealed  all  laws  concerning 
the  Appellate  Court  and  created  a  new  Court  of  Appeals. 
The  Justices  of  the  old  court  took  the  ground  that  their 
offices  were  created  by  the  Constitution  and  could  be  abol- 
ished only  by  constitutional  amendment.  Their  records 
were  taken  from  them  and  kept  under  military  guard,  but 
the  old  court  continued  to  meet  and  decide  cases  alongside 
of  the  new.  The  next  electoral  campaign  found  the  people 
in  more  sober  mood.  The  "  Old  Court  party  "  elected  sixty 
members  of  the  legislature  against  thirty-five  of  the  ' '  New 
Court  party,"  and  at  the  next  election  a  majority  of  the 
Senate  was  secured  and  a  bill  was  passed  in  December,  1825, 
over  the  veto  of  the  governor,  by  which  all  the  laws  consti- 
tuting the  new  court  were  repealed.1  An  act  was  passed  in 
1830  by  which  the  Bank  of  the  Commonwealth  ceased  to  loan 
money,  apparently  for  the  reason  that  no  one  cared  to  borrow 
the  sort  of  money  which  it  issued.  The  Commonwealth  of 
Kentucky  had  a  share  in  some  banks  afterwards  established, 
but  it  did  not  again  attempt  the  folly  of  State  management. 

The  State  of  Alabama  had  an  experience  with  a  bank  of 
State  which,  according  to  Governor  Jones,  has  subjected  the 


Shaler,  178-84. 


THE   STATE  BANKING   SYSTEMS.  381 

people  to  a  permanent  tax  of  nearly  $1000  per  day  for  taxa- 
tion to  meet  the  cost  of  the  experiment.1  An  act  was 
passed  December  21,  1820,  to  incorporate  the  Bank  of  the 
State  of  Alabama,  but  it  provided  for  a  capital  of  $2,000,- 
ooo,  of  which  three-fifths  was  to  be  obtained  by  private 
subscriptions.  Subscriptions  were  slow  in  coming  and  the 
difficulty  was  met  by  an  Act  of  1823,  removing  any  limit 
upon  the  capital  and  providing  that  the  State  should  furnish 
the  whole.  Various  public  funds  were  set  apart  to  consti- 
tute a  part  of  the  capital,  among  them  the  proceeds  from  the 
sale  of  lands  donated  by  Congress  for  schools,  amounting  to 
about  $1,300,000,  and  the  funds  of  the  University  of  Ala- 
bama to  the  amount  of  about  $500,000.  These  grants  were 
only  a  beginning,  and  between  1832  and  1837  the  State 
issued  bonds  to  the  amount  of  $13,800,000  for  the  increase  of 
the  capital  of  the  bank  and  to  enable  it  to  resume  specie 
payments. 

The  purpose  of  the  founders  of  the  bank  was  to  distribute 
the  bank  money  as  evenly  as  possible  among  the  people  of 
the  State  and  the  original  act  stipulated  that  the  loans 
be  apportioned  among  the  several  counties  in  proportion  to 
their  representation  in  the  General  Assembly.  L,oans  to  a 
single  individual  or  corporation  were  not  to  exceed  $2,000, 
but  this  rule  was  not  closely  adhered  to  in  loans  to  the 
president  and  directors.  The  president  and  twelve  direc- 
tors were  chosen  by  the  General  Assembly  and  the  choice 
of  directors  for  the  branch  banks  increased  the  number 
annually  chosen  to  between  sixty  and  seventy.  Candidates 
for  the  assembly  were  compelled  to  promise  their  supporters 
liberal  loans  in  case  of  election  and  to  exact  pledges  from 
candidates  for  the  directorships  that  the  loans  should  be 
granted.  One  of  the  hotel  keepers  of  Tuscaloosa  succeeded 
in  securing  an  election  as  director  in  1832  and  his  hotel 
swarmed  with  members  of  the  legislature  and  persons 
desiring  to  borrow  money,  who  hoped  to  secure  his  support 
in  the  negotiation  of  loans.  Four  other  hotel  keepers 


Century,  Cheap  Money  Experiments,  88. 


382          HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

realized  that  they  were  conducting  business  under  a  heavy 
handicap  and  secured  their  own  election  as  directors  in  1834. 
A  director  could  not  afford  to  refuse  a  discount  requested  by 
a  member  of  the  legislature  and  the  discounts  of  the  bank 
increased  from  $448,859  in  1826  to  $20,642,473  in  November, 
1837.  The  circulation  had  swelled  in  the  meantime  from 
$273»507  to  $6,676,050. 

Those  were  ' '  flush  times ' '  in  Alabama  and  so  complete 
was  the  intoxication  of  the  people  with  the  paper  money 
craze  that  the  General  Assembly  on  January  9,  1836,  passed 
an  act  abolishing  direct  taxation  in  the  State  and  setting 
aside  $100,000  of  the  bank  money  to  defray  the  expenses  of 
the  State  government.  The  crisis  of  1837  le(l to  an  investi- 
gation of  the  discounts  and  it  was  found  that  over  $6,000,000 
were  worthless.  Confidence  in  the  paper  money,  ' '  sup- 
ported by  the  faith  and  credit  and  wealth  of  the  State, ' '  to 
use  the  favorite  phrase  of  the  champions  of  government 
paper  money,  suddenly  collapsed  and  with  it  the  whole 
structure  of  business  and  credit  in  Alabama.  The  General 
Assembly  was  hastily  summoned  in  special  session  and 
authorized  a  loan  to  the  people  of  $5,000,000  in  bank  money, 
which  was  increased  by  $2,500,000  in  December;  but  the 
fever  had  run  its  course,  the  charters  of  the  branch  banks 
were  repealed  in  1842,  and  the  charter  of  the  State  Bank  was 
not  renewed  when  it  expired  in  1845.  The  assets  of  the 
bank  netted  about  $10,000,000  towards  reducing  the  bonded 
debt  to  the  State,  but  $4,000,000  was  a  dead  loss,  in 
addition  to  the  public  funds  originally  set  aside  for  the  use 
of  the  bank.  The  effect  of  their  experiment  with  a  bank 
of  State  upon  the  people  of  Alabama  was  indicated  by  the 
provision  of  the  constitution  of  1867,  that  "The  State  shall 
not  be  a  stock-holder  in  any  bank,  nor  shall  the  credit  of 
the  State  ever  be  given  or  loaned  to  any  banking  company 
or  association  or  corporation. ' ' 

Mississippi  had  a  similar  experience.  Two  early  experi- 
ments in  State  ownership  with  bad  results  did  not  deter  the 
people  from  the  establishment  of  the  Union  Bank  of  Missis- 
sippi in  1838  with  a  capital  of  $15,000,000.  This  capital 


THE  STATE  BANKING  SYSTEMS.  383 

was  to  be  raised  by  means  of  loans  to  be  obtained  from  the 
directors  and  the  loans  were  to  be  negotiated  through  bonds 
of  the  State  for  which  the  credit  of  the  State  was  pledged. 
The  first  block  of  $5,000,000  in  bonds  was  sold  at  par  through 
Nicholas  Biddle,  president  of  the  Bank  of  the  United  States. 
The  bank  management  exercised  the  worst  possible  judg- 
ment in  loans  and  advances  and  the  bank  ran  its  course 
within  four  years.  Post  notes  were  issued,  on  account  of 
the  suspension  of  specie  payments,  and  the  issues  of  the 
bank  and  its  six  branches  had  increased  in  April,  1840,  to 
$3, 337,665.  The  other  banks  vied  with  the  Union  Bank  in 
the  issue  of  currency  and  at  the  close  of  1839  the  twenty-six 
banks  in  the  State  professed  to  have  a  paid  up  capital  of 
$30, 379,403,  loans  and  discounts  of  $48,333,728  and  a  circula- 
tion of  $15,171,639.  As  the  free  white  population  of  the 
State  at  that  time  was  only  170,000,  the  alleged  paid-up 
capital  equalled  $180  per  capita,  loans  and  discounts  $285, 
and  circulation  nearly  $90.  The  State  repudiated  her  obliga- 
tions on  the  bonds  issued  and  never  attempted  to  pay  them. 
The  results  upon  the  community  are  thus  set  forth  by  Mr. 
Henry  V.  Poor  :  l 

The  $48,000,000  of  loans  were  never  paid  ;  the  $23,000,000  of  notes 
and  deposits  never  redeemed.  The  whole  system  fell,  a  huge  and 
shapeless  wreck,  leaving  the  people  of  the  State  very  much  as  they 
came  into  the  world.  Their  condition  at  the  time  beggars  description. 
Society  was  broken  up  from  its  very  foundations.  Everybody  was  in 
debt,  without  any  possible  means  of  payment.  Lands  became  worth- 
less, for  the  reason  that  no  one  had  any  money  to  pay  for  them. 
The  only  personal  property  left  was  slaves,  to  save  which,  such  num- 
bers of  people  fled  with  them  from  the  State  that  the  common  return 
upon  legal  processes  against  debtors  was  in  the  very  abbreviated  form 
of  "  G.  T.  T.," gone  to  Terras, — a  State  which  in  this  way  received  a 
mighty  accession  to  her  population. 

Several  other  Southern  and  Western  States  went  through 
similar  experiences.  The  Union  Bank  of  Florida,  chartered 
by  the  territorial  government  on  February  12,  1833,  with  a 
capital  of  $1,000,000,  was  assisted  by  the  issue  of  State  bonds, 

1  Money  and  Its  Laws,  540. 


384         HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

of  which  more  than  half  were  sold  in  Europe.  The  pro- 
ceeds were  loaned  on  stock  and  mortgages,  mainly  to  stock- 
holders, and  the  circulation  was  run  up  in  1839  to  $551,747. 
A  committee  of  the  legislature  made  an  investigation  in 
1840  and  their  report  was  very  unfavorable  to  the  bank. 
The  State  government,  after  the  admission  of  Florida  to  the 
Union,  refused  to  recognize  the  privileges  of  the  Union 
Bank  and  the  Secretary  of  State  reported  in  1858  that  its 
circulating  notes  were  worth  not  more  than  twenty  cents  on 
the  dollar.  A  real  estate  bank  was  one  of  the  features  of 
the  Arkansas  system,  towards  which  the  subscribers  to  the 
stock  were  required  to  pay  nothing  in,  but  merely  to  secure 
their  subscriptions  by  mortgaging  their  real  estate.  The 
working  capital  of  the  institution  was  obtained  by  the  issue 
of  State  bonds,  of  which  $2,000,000  were  authorized.  "A 
prudent  expansion  of  the  currency  of  the  State ' '  was  one 
of  the  avowed  objects  of  the  bank  and  loans  were  made 
within  a  year  after  opening  on  December  12,  1838,  amount- 
ing to  $1,585,190.  The  circulation  of  the  bank  at  this  time 
was  only  $156,910,  but  specie  payments  were  suspended  and 
circulation  was  increased  in  May,  1840,  to  $759,000.  The 
notes  suffered  a  discount  of  forty  to  forty-five  per  cent,  and  it 
was  soon  discovered  that  the  collection  of  loans  on  maturity 
was  a  far  different  matter  from  making  them.  The  directors 
made  an  assignment  on  April  2,  1842,  and  the  notes  of  the 
bank  afterward  passed  for  about  twenty-five  per  cent,  of 
their  face  value  in  specie.  A  like  experiment  had  been 
going  on  in  the  meantime  with  the  Bank  of  the  State  of 
Arkansas  and  the  total  amount  of  unredeemed  bonds  issued 
by  the  State  on  behalf  of  both  banks,  including  interest,  up 
to  October  i,  1868,  was  $4,993,503. 

Illinois  tried  several  experiments  at  issuing  money  upon 
' '  the  credit  of  the  State, ' '  and  the  circulation  of  the  State 
Bank  of  Illinois,  incorporated  in  1821,  did  not  exceed  $300,- 
000.  Even  this  moderate  limit  did  not  keep  the  notes  from 
falling  within  three  years  to  twenty-five  cents  on  the  dollar, 
and  in  1825  an  act  was  passed  requiring  the  cashier  of  the 
bank  to  collect  all  the  signed  and  unsigned  notes  in  his  pos- 


THE   STATE  BANKING  SYSTEMS.  385 

session  and  burn  them  in  the  public  square  of  Vandalia,  in 
the  presence  of  the  governor  and  the  judges  of  the  Supreme 
Court.  The  next  State  Bank  was  incorporated  in  1835  and 
$2,000,000  of  the  capital  subscribed  by  the  State  was  paid  by 
the  issue  of  bonds,  which  were  taken  by  the  bank  at  par. 
Assistance  was  also  given  to  the  Bank  of  Illinois  at  Shaw- 
neetown,  but  both  banks  collapsed  in  1842  and  the  State  was 
saved  from  much  actual  loss  by  the  surrender  by  the  banks 
of  the  State  stock,  which  was  burned  in  the  Capital  Square 
at  Springfield  in  the  presence  of  the  legislature.  The  Con- 
stitution of  1848  provided  that  no  State  bank  should  there- 
after be  created  nor  should  the  State  own  any  banking  stock. 
Tennessee  authorized  a  State  Bank  in  1820,  which  issued 
$1,000,000  in  inconvertible  notes  in  loans  of  $500  each  upon 
real  estate  mortgages  worth  double  the  amount.1  The  notes 
quickly  dropped  below  par  and  the  bank  closed  in  1832. 

Louisiana  incorporated  the  Union  Bank  of  Louisiana  in 
1832  upon  similar  principles  with  those  of  the  Union  Bank 
of  Florida  and  issued  $7,000,000  in  State  bonds  to  provide 
the  capital.  Bonds  to  the  amount  of  $10,004,000  were  issued 
to  two  other  institutions,  but  all  three  failed  in  1842  and  the 
State  enacted  a  sound  banking  law,  under  which  she  became 
in  1860  the  fourth  State  in  the  Union  in  banking  capital  and 
the  second  in  specie  holdings.2  The  essential  feature  of  the 
law  was  the  requirement  that  the  liabilities  be  covered  one- 
third  by  specie  and  the  remaining  two-thirds  by  commercial 
paper  having  not  more  than  ninety  days  to  run.  Louisiana 
prohibited  State  subscriptions  for  bank  stock  in  her  constitu- 
tion of  1852.  Georgia,  Vermont,  Missouri,  Delaware  and 
the  Carolinas  all  tried  State  ownership  and  management  of 
banks,  but  the  first  two  early  abandoned  the  experiment. 
The  others  ceased  to  be  banks  of  issue  with  the  establish- 
ment of  the  national  banking  system.  The  Farmers'  Bank 
of  Delaware  was  never  much  under  political  influences  and 
is  still  conducted  as  a  bank  of  discount  and  deposit.  The 
Bank  of  Missouri  had  a  coin  reserve  of  one-third  of  its  cir- 

1  Knox,  Rhodes' s  Journal  of  Banking,  Oct.,  1892. 

2  White,  Sound  Currency,  Vol.  II.,  No.  i,  p.  5. 


HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

dilation  and  its  connection  with  the  State  ended  in  1866  by 
the  sale  of  the  State  stock. 

The  State  Bank  of  Indiana  stands  out,  in  the  language  of 
Mr.  Horace  White,  a  ' '  notable  tribute  to  sound  banking 
principles  from  the  weltering  mass  of  bank  failures  of  the 
period  covered."  The  first  bank  of  State  was  created  origi- 
nally as  a  private  institution  and  adopted  by  the  constitu- 
tion of  the  State  upon  her  admission  in  1816  as  a  public 
bank.  The  experiment  was  a  failure  and  it  was  not  until 
1834  that  the  State  Bank  of  Indiana  was  incorporated,  with 
ten  branches.  The  parent  bank,  with  a  president  and  five 
directors  elected  by  the  legislature,  acted  as  a  sort  of  board 
of  control  over  the  branches,  each  of  which  was  organized 
with  a  capital  of  $i 60,000  and  chose  one  director  as  a  part 
of  the  board  of  control.  The  two  essential  differences  be- 
tween the  Bank  of  Indiana  and  the  other  banks  of  State  were 
the  payment  of  the  capital  in  actual  cash  and  the  issue  of 
notes  upon  liquid  assets.  The  State,  which  took  half  the 
capital  of  each  branch,  paid  its  proportion  in  silver  and  ad- 
vanced five-eighths  of  the  private  capital  by  the  sale  of  five 
per  cent,  bonds  in  L,ondon,  taking  mortgage  security  for  the 
final  payment  by  the  shareholders  and  crediting  them  with 
the  dividends  paid  by  the  bank.  The  remaining  three- 
eighths  of  the  private  capital  was  paid  in  cash  by  the  share- 
holders, and  each  shareholder  was  made  liable  for  an 
amount  equal  to  his  stock  and  the  branches  were  jointly 
liable  for  each  other's  debts.  The  bank  had  a  circulation  in 
1839  of  $2,951,594. 

The  State  Bank  maintained  a  high  credit,  but  was  unable 
to  obtain  the  renewal  of  its  charter  upon  its  expiration  in 
1857  because  of  a  provision  in  the  new  constitution  of  1851 
that  ' '  the  State  shall  not  be  a  stock-holder  in  any  bank  after 
the  expiration  of  the  present  bank  charter."  The  State 
realized  profits  of  $3,500,000  on  the  $1,000,000  invested  in 
the  institution,  and  its  management  had  done  so  much  for  the 
development  of  the  State  that  special  privileges  were  given 
to  a  new  State  Bank  of  Indiana  which  was  chartered  March 
3,  1855.  The  act  of  incorporation  was  quietly  carried 


THE  STATE  BANKING  SYSTEMS.  387 

through  by  a  syndicate  of  politicians,  who  became  large 
subscribers  to  the  stock  of  the  various  branches.  They 
opened  negotiations  with  the  managers  of  the  old  bank  for 
the  sale  of  the  franchises  and  the  latter  made  the  purchase 
upon  the  condition  that  Hugh  McCulloch,  who  had  been  for 
twenty  j^ears  manager  of  the  old  Fort  Wayne  branch,  should 
be  made  the  president.  The  bank  weathered  the  crisis  of 
1857  without  suspending  specie  payments  and  rapidly  retired 
its  circulation  when  gold  went  to  a  premium  in  1862.  The 
bank  was  required  by  the  conditions  of  its  charter  to  pay  its 
notes  in  coin,  but  a  decision  was  obtained  from  the  Supreme 
Court  of  the  State  that  the  United  States  legal  tender  notes 
were  lawful  money  and  could  be  lawfully  used  for  the  re- 
demption of  the  notes.  The  circulation  was  reissued  upon 
this  basis,  but  upon  the  imposition  of  the  ten  per  cent,  tax 
on  the  circulation  of  State  banks  the  State  Bank  of  Indiana 
wound  up  its  affairs  with  ample  assets  and  unimpaired 
credit. l 

The  suspension  of  specie  payments  at  the  outbreak  of  the 
Civil  War  drove  gold  and  silver  from  circulation  and  required 
an  expansion  of  bank-note  issues  to  maintain  the  volume  of 
the  currency.  The  Suffolk  system  continued  in  operation  at 
Boston,  but  the  notes  failed  to  flow  in  as  rapidly  as  before 
for  redemption.  The  fact  was  noted  and  commented  upon 
by  the  reports  of  the  bank  commissioners  of  Maine,  New 
Hampshire  and  Massachusetts  in  their  annual  reports  at  the 
close  of  1862  and  among  the  reasons  assigned  was  the  fact 
that  *  *  in  the  present  unsettled  state  of  public  affairs,  the 
people  have  more  confidence  in  the  bills  of  the  local  banks 
than  in  any  other  paper  currency."8  Other  reasons  sug- 
gested were  the  large  sums  carried  by  soldiers  to  the  seat  of 
war  and  other  sums  left  to  be  expended  by  their  families, 
and  the  large  amount  of  Eastern  bills  sent  to  the  West  by 

1  McCulloch,  Ch.  xi.-xii. 

2  Report  of  the  Bank  Commissioners  of  Maine,  December  8,  1862, 
in  Annual  Report  of  the  Secretary  of  the  Treasury  on  the  Condition 
of  the  Banks  of  the  United  States  at  the  Commencement  of  the  Year 
1863,  p.  3. 


388         HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

New  York  banks,  to  fill  the  gap  created  by  the  winding  up 
of  local  institutions.  The  bank  commissioners  of  Massa- 
chusetts maintained  that  when  specie  payments  are  sus- 
pended, "  and  bills  are  no  longer  redeemable  in  gold,  a  great 
motive  for  sending  them  home  is  withdrawn,  since,  if  in  good 
credit,  they  are  as  valuable  as  anything  which  can  be  got  in 
exchange  for  them.  Men  hold  them  and  hoard  them,  there- 
fore, precisely  as  they  would  do  with  specie,  and  the  volume 
of  the  currency  becomes  greater  precisely  as  its  current  grows 
more  sluggish." 

It  was  very  generally  feared  that  the  banks  would  sell 
their  gold  at  a  profit  as  it  attained  a  high  premium  over  legal 
tender  paper,  but  the  New  England  banks  generally  held  on 
to  their  specie  as  a  provision  for  the  protection  of  their 
creditors  and  as  security  for  future  resumption.  The  com- 
missioner of  Maine  reported,  regarding  the  sale  of  specie 
for  a  premium,  that  "  No  instance  has  come  to  our  knowl- 
edge where  any  bank  has  done  anything  of  this  kind  ;  and 
certainly  it  cannot  have  been  practised  to  any  great  extent, 
for  the  comparative  tables  show  that,  notwithstanding  the 
suspension  act,  the  specie  in  our  banks  has  decreased  only 
some  $40,000."  The  New  Hampshire  commissioners  re- 
ported that  "  the  banks  have  not  only  kept  their  faith  with 
the  public,  in  retaining  their  specie  in  the  vaults,  but  have 
actually  increased  the  aggregate  amount  of  specie,  $38,827.52, 
or  more  than  twelve  per  cent."  The  Massachusetts  com- 
missioners undertook  to  discourage  sales  of  specie  and  de- 
clared that  they  ' '  regard  the  sale  of  gold  by  the  banks  as 
altogether  illegal,  so  long  as  they  refuse  to  pay  specie  on 
their  obligations." 

One  of  the  disadvantages  of  issuing  bank-note  circulation 
on  securities  was  disclosed  at  the  outbreak  of  the  war  in  the 
sudden  fall  in  value  of  Southern  State  bonds  pledged  by 
Northern  banks  to  secure  their  circulation.  This  shrinkage 
in  the  value  of  the  security  for  the  notes  was  especially  felt 
in  Wisconsin.  The  case  of  the  Koshkonong  Bank,  whose 
stock  amounted  at  par  to  $48,000,  of  which  all  but  $3,000 
was  issued  by  Southern  States,  was  one  of  the  worst,  but 


THE   STATE  BANKI.VG  SYSTEMS. 


389 


was  typical  of  many  others.  The  net  proceeds  of  the  bonds, 
when  sold  in  the  New  York  market,  were  only  $2 1,769  and 
afforded  the  billholders  only  fifty-four  and  three-fourths  per 
cent,  on  the  dollar  against  an  apparently  well  secured  cir- 
culation of  $39,779.  The  Bank  Comptroller  of  Wisconsin 
was  compelled  to  call  upon  nearly  all  the  banks  to  make 
good  the  depreciation  of  stocks  and  their  position  became 
so  precarious  that  a  joint  resolution  was  passed  by  the  legis- 
lature on  February  15,  1861,  suspending  further  calls  for 
additional  securities.  The  Comptroller  declared  that  "a 
general  failure,  involving  three-fourths  of  all  the  banks,  was 
imminent  unless  relief  in  some  shape  was  granted  ;  and  there 
is  scarcely  any  occasion  for  doubt  but  at  least  eighty  out  of 
the  one  hundred  and  nine  then  existing  banks  would  have 
failed." 

The  resolution  of  February  was  rescinded  early  in  April 
and  another  call  was  made  upon  the  banks  to  bring  up  the 
value  of  their  stocks.  Thirteen  banks  failed  to  respond  and 
resisted  the  action  of  the  Comptroller  in  the  courts.  The 
stronger  banks  gradually  replaced  Southern  securities  by 
those  of  Northern  States  and  continued  business  upon  this 
basis  until  the  establishment  of  the  national  banking  system. 
A  shrewd  stock  jobbing  scheme  was  put  in  operation  by 
some  of  the  bankers  in  the  meantime  by  buying  up  depreci- 
ated currency  at  a  great  discount  and  offering  it  to  the 
Comptroller  for  redemption  in  the  better  class  of  bonds, 
which  could  then  be  sold  at  a  handsome  margin  over  the 
cost  of  the  currency.  The  Comptroller  refused  to  permit 
the  withdrawal  of  bonds  except  in  such  a  way  as  to  leave 
the  better  bonds  in  the  custody  of  the  State  as  security  for 
the  remaining  circulation,  but  he  modified  this  policy  when 
he  found  speculators  holding  on  to  the  notes,  in  anticipation 
of  their  final  redemption  from  the  proceeds  of  the  stock,  and 
surrendered  good  and  bad  stocks  in  fixed  proportions. 1 

The  New  England  banks  felt  the  pressure  of  the  repudia- 

1  Report  of  G.  Van  Steenwyck,  Bank  Comptroller  of  Wisconsin, 
Madison,  October  I,  1861.  House  Ex.  Doc.  25,  37th  Cong.,  3d  Sess., 
190-94. 


390         HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

tion  of  Southern  obligations,  but  they  had  been  preparing 
for  it.  Deposits  fell  in  Boston  from  $20,811,889  on  October 
8,  1860,  to  $17, 176, 778  on  December  loth,  and  specie  reserves 
fell  on  December  i7th  to  $3,491,348, — far  below  the  limit  re- 
quired by  law.  The  whole  amount  of  Southern  indebted- 
ness to  the  North  was  estimated  by  intelligent  merchants  in 
New  York  and  Boston  at  $200,000,000,  and  a  large  part  of 
it  was  lost  by  the  breaking  out  of  war.1  The  Boston  banks, 
however,  succeeded  in  restoring  their  specie  reserves  by 
March,  1861,  to  $5,601,871,  and  the  manner  in  which  the 
banks  of  the  State  met  their  losses  is  thus  described  by  the 
bank  commissioners : 

The  system  pursued  by  them  for  many  years,  of  making  an  annual 
reservation  of  a  portion  of  their  yearly  earnings,  had  in  some  measure 
protected  them  against  unusual  amounts  of  dishonored  and  worthless 
paper.  By  the  bank  returns  on  the  last  Saturday  of  October  1860, 
the  net  profits  then  on  hand  amounted  to  $6,360,539.11,  or  9r95per  cent. 
of  the  aggregate  banking  capital  of  the  Commonwealth.  And  we  do 
not  hesitate  to  express  the  opinion,  based  upon  the  examinations  we 
have  made  during  the  past  year,  and  from  information  specially  ob- 
tained from  other  banks,  principally  in  Boston,  that,  notwithstanding 
the  losses  which  some  banks  must  inevitably  sustain,  the  whole 
amount  of  final  loss  growing  out  of  our  difficulties  with  the  South 
will  be  more  than  covered  by  the  general  surplus,  thus  leaving  the 
aggregate  bank  capital  free  and  unimpaired.2 


1  Some  estimated  it  at  $200,000,000  to  New  York  alone. — Rhodes, 
III,  560.  The  honorable  conduct  of  the  New  Orleans  banks  is  pleas- 
antly referred  to  by  Secretary  Hugh  McCulloch.  The  branches  of  the 
Bank  of  Indiana  in  the  southern  part  of  the  State,  he  says,  "had 
large  dealings  with  men  who  were  engaged  in  the  Southern  (Missis- 
sippi) trade,  and  when  measures  were  being  instituted  for  the  seces- 
sion of  Louisiana  from  the  Union,  and,  indeed,  after  the  ordinance  of 
secession  had  been  adopted,  these  branches  had  large  cash  balances 
and  large  amounts  of  commercial  paper  in  the  New  Orleans  banks. 
Against  the  remonstrances  of  the  secession  leaders,  and  in  disregard 
of  threatened  violence,  these  cash  balances  and  the  proceeds  of  the 
commercial  paper  as  it  matured  were  remitted  for  according  to  direc- 
tions,— not  a  dollar  was  withheld." — Men  and  Measures  of  Half  a 
Century,  139. 

9  House  Ex.  Doc.  25,  3yth  Cong.,  3d  Sess.,  50. 


THE   STATE  BANKING   SYSTEMS. 


391 


The  growth  of  the  capital  and  business  of  the  State  banks 
of  circulation  is  shown  in  the  following  table  : 


YEAR. 

NO.  OF 
BANKS. 

CAPITAL  STOCK. 

LOANS  AND  DISCOUNTS. 

DEPOSITS. 

1834 

506 

$200,005,944 

$324,119,499 

$  75,666,986 

1835 

704 

23t,250,337 

365,163,834 

83,081,365 

1836 

713 

251,875,292 

457,506,080 

115,104,440 

1837 

788 

290,772,091 

525,115,702 

127,397,185 

1838 

829 

317,636,778 

485,631,687 

84,691,184 

1839 

840 

327,132,512 

492,278,015 

90,240,146 

1840 

901 

358,442,692 

462,896,523 

75,696,857 

1841 

784 

313,608,959 

386,487,662 

64,890,101 

1842 

692 

260,171,797 

323,957,569 

62,408,870 

1843 

691 

228,861,948 

254,544,937 

56,168,628 

1844 

696 

2IO,872,O56 

264,905,814 

84,550,785 

1845 

707 

206,045,969 

288,617,131 

88,020,646 

1846 

707 

196,894,309 

312,114,404 

96,913,070 

1847 

'  715 

2O3,O7O,622 

310,282,945 

9!>792,533 

1848 

751 

204,838,175 

344,476,582 

103,226,177 

1849 

782 

207,309,361 

332,323,195 

91,178,623 

i860 

824 

217,317,211 

364,204,078 

109,586,595 

1851 

879 

227,807,553 

413,756,799 

128,957,712 

1853 

750 

207,908,519 

408,943,758 

145,553,876 

1854 

,208 

301,376,071 

557,397,779 

188,188,744 

1855 

,307 

332,177,288 

576,144,758 

190,400,342 

1856 

,398 

343,874,272 

634,183,280 

212,705,662 

1857 

,416 

370,834,686 

684,456,887 

230,351,352 

1858 

,422 

394,622,799 

583,165,242 

185,932,049 

1859 

,476 

401,976,242 

657,183,799 

259,568,278 

1860 

,562 

421,880,095 

691,945,580 

253,802,129 

1861 

,601 

429,592,713 

696,778,421 

257,229,562 

1862 

,492 

418,139,741 

646,677,780 

296,322,408 

1863 

,466 

405,045,829 

648,601,863 

393,686,226 

Tradition  has  handed  down  unhappy  memories  of  the  State 
banks,  which  have  been  distorted  by  the  lapse  of  time  into 
conceptions  very  different  from  the  facts.  The  several  sys- 
tems, taken  in  the  aggregate  for  the  entire  country,  had  the 
great  practical  defect  of  lack  of  uniformity.  This  defect 
was  great  enough  to  obscure  the  essential  merits  of  many  of 
the  State  systems  and  to  make  any  system  which  was 
national  in  its  scope  and  uniform  in  its  character  attractive 
to  the  business  community  of  the  whole  country.  Whatever 
the  merits  or  defects  of  the  State  systems,  the  currency  in 
circulation  was  judged  by  the  worst  of  the  systems,  for  by 
the  operation  of  Gresham's  law  that  currency  tended  to  drive 


3Q2          HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

out  of  circulation  all  kinds  which  were  superior  ;  and  even 
where  this  was  prevented  by  laws  or  local  conditions,  the 
bad  currency  was  a  constant  source  of  irritation  from  the 
very  necessity  of  discriminating,  in  receiving  money  pay- 
ments, between  the  bad  and  the  good.  One  of  the  require- 
ments of  the  modern  business  world  is  undoubtedly  a 
uniformity  of  currency  which  shall  obviate  the  necessity  for 
discrimination  and  make  every  dollar  of  equal  exchange 
value  with  every  other.  This  condition  was  not  met  by  the 
aggregate  of  State  currencies  and  the  fact  that  it  was  fully 
met  by  the  New  England  currency  at  its  best  may  easily 
have  been  obscured,  in  the  minds  of  New  Englanders,  by 
the  multiplicity  of  good  and  bad  currencies  from  other  sec- 
tions which  caused  perpetual  inconvenience. 

The  national  banking  system  of  later  years  garnered  up 
the  lessons  of  many  experiments  with  banking  upon  securi- 
ties, adopted  most  of  the  good  and  discarded  most  of  the 
bad  features,  and  afforded  the  country  two  of  the  great  bene- 
fits of  a  sound  currency, — security  and  uniformity.  The 
necessity  of  discrimination  between  currencies  ceased  when 
every  dollar  in  circulation  rested  upon  a  common  basis, — the 
credit  of  the  national  government.  The  necessity  of  paying 
high  exchange  rates,  or  surrendering  the  notes  of  distant 
banks  at  a  heavy  discount,  ceased  also  when  every  note 
became  as  good  in  one  part  of  the  Union  as  in  another. 
Coupled  with  these  great  benefits  of  the  new  system  was  the 
feature  of  Federal  supervision  and  examination,  which 
arrested  the  creation  of  fraudulent  banks  at  the  outset  and 
subjected  them  annually  or  oftenerto  the  power  of  visitation 
by  the  national  authority.  The  three  great  benefits,— secur- 
ity, saving  of  exchange,  and  Federal  supervision, — are  al- 
most inherent  parts  of  a  national  system.  The  fact  that 
they  have  been  associated  with  a  particular  national  system 
has  led  many  to  believe  that  there  can  be  no  other  equally 
good,  and  that  enmity  to  the  present  banking  law  is  enmity  to 
the  principles  of  sound  finance.  But  all  these  benefits  can 
be  obtained  under  national  law  with  the  added  benefits, 
which  the  present  system  lacks,  ofjajbanking  currency  ample 


THE   STATE  BANKING  SYSTEMS.  393 

for  the  demands_Q£Jntsi"^gty  yn't  limit  the  help  of  government 
paper  money,  and  flexibly  r?ppnnsi  v£~tn  those  rlptrTgnrl^ 

The  foundation  of  a  national  currency  upon  evidences  of 
public  debt  is  dangerous  and  unscientific  and  proved  fatal  to 
some  of  the  State  currencies  before  the  Civil  War.  A  com- 
parison of  the  State  systems  shows  a  distinct  line  of  cleavage 
which  is  far  from  favorable  to  the  principles  of  the  present 
national  banking  law.  This  line  of  cleavage  separates  the 
banks  issuing  currency  against  general  assets,  like  those  of 
New  England,  Indiana,  and  Louisiana,  from  those  issuing 
circulation,  on  the  other  hand,  against  securities,  like  the 
banks  of  New  York,  Illinois,  and  Wisconsin,  and  those 
established  under  the  parental  care  of  the  State,  like  the 
Bank  of  the  Commonwealth  of  Kentucky,  the  Union  Bank 
of  Florida,  the  State  Bank  of  Alabama,  and  the  Bank  of 
Mississippi.  The  experience  of  the  New  England  and 
Indiana  banks  is  the  triumphant  vindication  of  the  principle 
of  banking  on  general  assets  and  issuing  notes  redeemable 
in  coin  on  demand,  which  is  supported  by  the  critics  of  the 
present  national  system  and  the  advocates  of  a  banking 
currency.  The  banks  issuing  circulation  on  securities,  with 
their  pitiable  failures  and  their  wildcat  banking,  were  the 
prototypes  of  the  national  system  and  afford  a  hint  of  what 
that  system  would  become  if  note  issues  based  upon  State 
and  municipal  securities  were  substituted,  as  is  sometimes 
proposed,  for  note  issues  based  upon  national  bonds.  It 
must  be  remembered,  moreover,  that  perfect  as  the  secur- 
ity seems  for  bank-notes  under  the  national  system,  it  is  a 
security  which  has  followed  the  tips  and  downs  of  govern- 
ment paper  money.  There  was  neither  purpose  nor  pretence 
of  maintaining  the  notes  of  national  banks  at  parity  with 
coin  while  the  notes  of  the  government  itself  and  the  bonds 
by  which  bank-notes  were  secured  were  depreciated.  Bank- 
notes remained  from  1864  to  1879  at  par  with  government 
obligations  because  those  obligations  themselves  were  far 
below  par  in  coin. 

If  the  banks  issuing  circulation  upon  securities  were  the 
model  for  the  national  banks  of  to-day,  the  banks  of  State 


394         HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

which  existed  before  the  war  were  the  models  and  the 
prototypes  of  the  Federal  treasury  management  under  the 
regime  of  legal  tender  paper.  Their  issues  were  not  bank- 
notes in  the  sense  in  which  banking  currency  is  opposed  to  a 
government  paper  currency,  but  they  were  simply  the  bills 
of  credit  of  the  State  resting  upon  the  credit  of  the 
State  as  completely  as  the  paper  roubles  of  the  Bank  of  Rus- 
sia. The  fact  that  they  were  hardly  ever  maintained  at  par 
in  coin,  in  spite  of  the  great  wealth  and  undoubted  hon- 
esty and  good  faith  of  the  people  of  the  various  common- 
wealths, is  a  practical  demonstration  of  the  folly  of  attempting 
to  do  a  banking  business  upon  general  credit  without  quick 
assets.  The  lesson  of  the  history  of  the  State  banking  sys- 
tems, reduced  to  its  simplest  terms,  is  the  success  of  the 
systems  based  upon  the  banking  principle  and  the  failure  of 
the  systems  based  upon  the  deposit  of  securities,  like  the 
national  banking  system,  or  based  simply  upon  the  public 
credit,  like  the  government  currency  system  of  the  United 
States. 

One  of  the  essential  errors  of  early  banking  in  the  United 
States  was  the  undue  expansion  of  credit  upon  slender  re- 
sources. It  is  an  error  common  in  a  new  country  and  one 
from  which  the  United  States  and  Australia,  in  more  recent 
years  and  under  other  systems  of  note  issue,  have  not  been 
exempt.  The  impression  has  been  assiduously  cultivated 
by  the  opponents  of  a  banking  currency  that  the  early 
American  banks  issued  a  volume  of  circulating  notes  enor- 
mously in  excess  of  the  legitimate  demands  of  business. 
This  impression  is  absolutely  unfounded  and  the  proof  is 
afforded  by  the  figures.  Some  of  the  State  banking  cur- 
rencies were  over-issued  in  the  sense  that  every  dollar  which 
is  not  kept  at  par  with  the  metallic  standard  is  improperly 
issued,  but  the  aggregate  banking  currency  of  the  country 
was  at  no  time  over-issued  in  the  sense  that  an  equal  volume 
of  good  money  was  not  capable  of  ready  and  healthy  absorp- 
tion by  the  legitimate  demands  of  business.  The  circulation 
of  all  forms  of  money  in  the  United  States  between  1880  and 
1895  nas  ranged  between  $21.71  and  $24.44  and  has  only 


THE  STATE  BANKING  SYSTEMS. 


395 


recently  been  regarded,  with  the  slackening  of  business  ac- 
tivity, as  beyond  the  volume  required  by  business  needs.  It 
is  only  necessary  to  compare  such  figures  with  those  of  the  cir- 
culation prior  to  the  Civil  War  to  show  how  erroneous  is  the 
assertion  that  the  currency  was  unduly  inflated  in  volume 
during  the  years  of  State  banking.  The  following  table 
shows  the  circulation  of  both  bank-notes  and  specie  at  vari- 
ous dates,  including  the  years  of  largest  circulation, — the 
difference  between  the  bank-note  circulation  and  the  total 
money  in  circulation  representing  the  specie  : 


YEAR. 

ESTIMATED  BANK- 
NOTES OUTSTANDING. 

TOTAL  NOTES  AND 
MONEY  IN  CIRCULA- 
TION. 

POPULATION. 

CIRCULA- 
TION PER 
CAPITA. 

l800 

%     IO,5OO,OOO 

$    26,500,000 

5,308,483 

$4.99 

1810 

28,000,000 

55,000,000 

7,239,881 

7.60 

1820 

44.800,000 

67,100,000 

9,633,822 

6.96 

1830 

6l,OOO,OOO 

87,344,295 

12,866,020 

6.69 

1835 

103,692,495 

145,799,637 

14,786,000 

9^86 

1837 

149,185,890 

217,185,890 

15,655,000 

13-87 

l84O 

106,968,572 

186,305,488 

17,069,453 

10.91 

1845 

98,608,711 

177,950,405 

19,878,000 

8.95 

1850 

131,366,526 

278,761,982 

23,191,876 

12.  02 

1853 

I88,l8l,000 

402,238,107 

25,615,000 

15.80 

1854 

204,689,207 

425,551,240 

26,433,000 

I6.IO 

1855 

186,952,223 

418,020,247 

27,256,000 

15-34 

I856 

195,747,950 

425,846,625 

28,083,000 

I5.I6 

1857 

214,778,822 

457,068,708 

28,916,000 

I5.8I 

I858 

155,208,344 

408,810,028 

29,753,ooo 

13.78 

1859 

I93,306,8l8 

438,967,542 

30,596,000 

14-35 

CHAPTER  XV. 

NATIONAL   BANKING    SYSTEM. 

State  of  the  National  Finances  at  the  Beginning  of  the  War — The 
Suspension  of  Specie  Payments  and  the  Loan  Policy  of  Secretary 
Chase — The  First  Plans  for  the  National  Banking  System — 
Changes  in  the  Circulation— The  Necessity  for  a  New  System 
and  the  Plan  of  Secretary  Carlisle — The  Adoption  of  the  Gold 
Standard  in  1900,  and  Later  Efforts  to  Secure  Banking  Reform. 

THE  national  banking  system  of  the  United  States  had 
its  origin  in  the  management  of  the  finances  during 
the  Civil  War.  The  system  was  hardly  in  operation 
until  the  war  was  two-thirds  over,  but  it  offered  a  market 
for  the  public  securities  which  contributed  materially  to 
raise  their  price  in  the  depreciated  paper  with  which  the 
government  discharged  its  obligations.  The  system  afforded 
the  country  for  some  years  a  currency  having  the  advantages 
of  uniformity  and  security,  and  possessed  in  these  respects  a 
great  advantage  over  the  bank  currency  of  the  different 
States  which  had  before  been  in  use.  The  national  bank- 
ing system,  however,  great  as  were  its  services  in  absorbing 
the  evidences  of  the  public  debt,  always  lacked  the  essential 
feature  of  a  purely  banking  currency.  The  currency  was 
without  elasticity,  in  the  sense  of  responsiveness  to  the 
demands  of  business,  and  the  volume  fluctuated  only  with 
the  price  of  securities.  The  gradual  reduction  of  the  public 
debt  has  removed  the  basis  for  national  bank-note  circulation 
until  it  has  become  but  a  minor  factor  in  the  currency  sys- 
tem of  the  country,  and  a  strong  demand  has  arisen  for  the 
separation  of  the  note  issues  from  public  securities. 

396 


THE  NATIONAL  BANKING  SYSTEM.  397 

The  United  States  at  the  outbreak  of  the  Civil  War  were 
conducting  their  financial  operations  through  the  independ- 
ent Treasury.  The  notes  of  the  State  banks  formed  a  large 
part  of  the  medium  of  exchange  in  private  transactions,  but 
only  specie  was  accepted  in  payments  to  the  government. 
The  aid  of  the  banks  was  not  sought  in  handling  funds,  in 
making  transfers,  in  placing  loans,  or  in  paying  interest. 
This  at  least  was  the  theory  of  the  independent  Treasury, 
although  in  fact  the  absence  of  proper  depositaries  led  many 
public  officers  to  deposit  their  funds  temporarily  in  the  banks 
at  their  own  risk.1  The  circulation  of  the  country  outside 
of  the  Treasury  on  July  i,  1861,  consisted  of  $246,400,000 
in  specie  and  $202,005,767  in  the  notes  of  State  banks, 
making  a  total  of  $448,405,767,  or  $13.98  per  capita.3  The 
essential  question  for  Mr.  Chase,  Lincoln's  Secretary  of  the 
Treasury,  was  whether  the  operations  of  a  great  war  could 
be  carried  on  through  these  instrumentalities.  The  question 
was  the  occasion  of  much  discussion  at  the  time  and  has  never 
been  answered  to  the  satisfaction  of  all  sides.  The  answer  of 
Mr.  Chase  was  that  the  operations  of  the  war  could  not 
be  carried  on  upon  a  basis  of  specie  and  State  bank  paper. 

The  government  was  obliged  almost  at  the  outset  to  abandon 
the  position  that  it  was  able  to  carry  on  its  own  finances  with- 
out the  help  of  the  banks.  Some  small  loans  had  been  placed 
by  public  subscription  during  the  administration  of  Buchanan, 
but  it  was  perfectly  obvious  that  great  sums  could  not  be 
obtained  quickly  except  from  the  banks,  which  had  the 
keeping  of  the  transferable  capital  of  the  country.  Secre- 
tary Chase  held  a  conference  in  New  York  on  August  9, 
1 86 1,  with  representative  bankers  of  New  York,  Philadel- 
phia, and  Boston.  They  agreed  to  advance  to  the  Treasury 
$150,000,000  in  gold,  to  be  secured  by  three-year  notes  bear- 
ing interest  at  7.30  per  cent.,  and  to  be  reimbursed  as  the 
proceeds  of  the  sale  of  bonds  were  covered  into  the  Treasury. 
This  union  of  the  banks  of  New  York,  Boston,  and  Phila- 
delphia  in  support  of  the  public  credit  was  one  of  the  most 

1  Kinley,  60-61. 

2  Finance  Report,  1894,  p.  cviii. 


398         HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

important  events  of  the  war  and  committed  the  conservative 
business  element  conclusively  to  the  side  of  the  Union  and 
the  policy  of  coercion  of  the  seceded  States.  The  banks  of 
the  three  big  Eastern  cities  had  an  aggregate  capital  of 
$120,000,000,  a  circulation  of  $16, 964,749,  deposits  of  $125,- 
617,207,  and  coin  reserves  of  $63,165,039,  the  latter  being 
equal  to  forty-five  per  cent,  of  demand  liabilities.1  They 
had  already  made  an  agreement  in  November,  1860,  when 
secession  compelled  them  to  contract  their  business  and  pre- 
pare for  a  period  of  stress,  for  issuing  clearing  house  certifi- 
cates and  making  the  specie  of  all  the  banks  available  as 
a  common  fund.8 

Congress  passed  an  Act  on  August  5,  1861,  relaxing  the 
provisions  of  the  sub-treasury  law  so  far  as  to  permit  the 
Secretary  of  the  Treasury  to  deposit  any  money  obtained 
from  loans  to  the  credit  of  the  United  States  Treasurer  in 
such  solvent  specie-paying  banks  as  he  might  select.3  The 
banks  accepted  this  law  as  authority  for  the  use  of  the  ordi- 
nary means  of  commercial  exchange, — bank-notes,  checks 
and  drafts, — in  the  transactions  of  the  government.  They 
recommended  to  the  Secretary,  therefore,  that  he  should 
take  the  proceeds  of  the  advances  made  by  the  banks  by 
drawing  checks  and  drafts  upon  the  banks,  in  favor  of 
public  creditors.  They  suggested  that  this  would  not  only 
prove  of  great  practical  convenience,  but  would  diminish 
the  hoarding  which  would  take  place  if  the  banks  paid  out 
their  coin  and  reduced  their  reserves  while  uneasiness  as  to 
the  future  prevailed  in  the  business  community.  Secretary 
Chase,  to  the  surprise  of  nearly  every  financier,  declared 
that  the  Act  of  August  5th  had  no  such  meaning  or  intent 
and  that  he  should  require  payment  of  the  advances  in  coin. 
The  subject  was  warmly  discussed  between  the  Secretary 
and  the  bankers,  but  the  Secretary's  purpose  was  unshaken 
and  the  banks  yielded  rather  than  break  off  negotiations 
so  important  to  the  maintenance  of  the  public  credit. 

1  Poor,  557. 

*  Bolles,  III,,  23. 

3  Acts  of  Thirty-seventh  Congress,  1st  Sess.,  Ch.  46,  Section  6. 


THE  NATIONAL  &ANK1XG  SYSTEAf.  399 

One  of  the  acts  of  the  special  session  of  Congress  in  the 
summer  of  1861  authorized  loans  in  several  forms,  including 
non-interest  bearing  notes  of  denominations  less  than  $50, 
payable  on  demand  by  the  assistant  treasurers  at  New  York, 
Boston,  and  Philadelphia.  These  notes  were  not  made  legal 
tender  and  Secretary  Chase,  in  recommending  them,  declared 
that  "The  greatest  care  will,  however,  be  requisite  to  pre- 
vent the  degradation  of  such  issues  into  an  irredeemable 
paper  currenc}^,  than  which  no  more  certainly  fatal  ex- 
pedient for  impoverishing  the  masses  and  discrediting  the 
government  of  any  country  can  well  be  devised."  Notwith- 
standing this  brave  language,  the  Treasury  began  to  issue 
the  new  notes  early  in  August.  They  were  very  reluctantly 
accepted  as  currency  and  the  banks  refused  to  receive  them 
except  as  special  deposits.  The  new  notes  threatened  to 
bring  infinite  disorder  into  the  currency  system  by  the  ele- 
ment of  inflation  which  they  involved.  The  banks  filed  a 
prompt  protest  against  thus  trifling  with  the  circulating 
medium  while  they  were  straining  their  resources  to  with- 
draw capital  from  active  industry  and  divert  it  to  the  uses 
of  the  government.  The  Secretary  intimated  that  he  would 
suspend  the  issue  of  such  notes  until  other  resources  were 
exhausted,  but  that  he  did  not  regard  it  as  proper  to  pledge 
himself  openly  not  to  exercise  a  power  conferred  by  law. 

This  was  before  the  advances  by  the  banks  had  begun,  and 
upon  this  assurance  they  began  to  pay  coin  into  the  sub- 
treasury  at  the  rate  of  about  $5, 000,000  at  intervals  of  six 
days.  The  attempt  to  secure  popular  subscriptions  for  the 
seven-thirty  notes  through  the  agents  of  the  government 
resulted  in  subscriptions  of  only  $24,678,866,  and  the  banks 
themselves  came  forward  and  took  the  notes  and  agreed  to 
negotiate  their  distribution  among  the  people.  So  perfect 
was  the  public  confidence  in  the  associated  banks  and  so 
rapid  the  circulation  of  the  money  that  the  specie  in  the 
banks  had  not  been  materially  reduced  after  the  payment  of 
the  second  instalment.  The  gold  paid  by  the  banks  into 
the  sub-treasury  was  disbursed  by  public  officers  and 
through  the  channels  of  circulation  found  its  way  back  into 


4OO         HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

the  banks.  There  was  no  apparent  reason  why  advances 
should  not  be  made  in  this  manner  to  meet  all  the  demands 
of  the  war  without  impairing  the  solvency  of  the  Eastern 
banks.  Fears  were  expressed  in  some  quarters  that  the 
coin  would  gradually  be  absorbed  by  the  Western  banks, 
some  of  which  were  on  a  rather  shaky  foundation  and  had 
issued  notes  secured  by  the  bonds  of  the  seceded  States. 
This  evil  had  not  begun  to  operate,  however,  before  Secre- 
tary Chase  again  began  to  put  in  circulation  a  mass  of  de- 
mand notes  issued  directly  by  the  government. 

The  Secretary  did  not  long  respect  his  assurances  to  the 
banks.  The  promise  was  given  in  August  and  heavy  issues 
of  notes  took  place  in  November.  They  were  not  cordially 
received  as  a  means  of  circulation  and  were  largely  presented 
to  the  sub- treasuries  for  redemption  in  coin.  The  Treasury 
had  little  coin  except  that  drawn  from  the  banks,  and  the 
coin  reserves  of  the  latter  now  began  to  decline  without  any 
signs  of  recuperation.  The  specie  in  the  New  York  banks, 
which  was  $49,733,990  on  August  iyth  and  $42,318,610  on 
December  yth,  fell  to  $29,357,712  on  December  28th.  A 
conference  was  held  with  Secretary  Chase  and  he  was  as- 
sured that  the  Treasury  notes  could  not  be  received  by  the 
banks  at  par  with  coin  and  that  their  steady  infusion  into 
the  currency  would  send  gold  to  a  premium  as  well  as  create 
an  inflation  of  the  paper  circulation  which  would  drag  down 
the  value  of  bank-notes  in  the  same  manner  as  the  Treasury 
notes.  The  Secretary  stubbornly  refused  to  change  his  pol- 
icy and  the  banks  voted  to  suspend  specie  payments  on  Mon- 
day, December  3ist.J  The  government  necessarily  followed 


1  Prof.  Sumner  seems  to  ignore  the  effect  of  the  government  issues 
of  the  demand  notes  and  declares  that  the  banks  suspended,  "  without 
any  earnest  attempts  to  avoid  it,  and  certainly  without  any  necessity." 
— History  of  American  Currency,  194.  Secretary  Chase,  on  the  con- 
trary, did  not  appear  to  blame  the  banks,  but  declared  that  unex- 
pected military  delays  had  increased  expenditures,  and  diminished 
confidence  in  public  securities,  and  that  "These  conditions  made  a 
suspension  of  specie  payments  inevitable." — Report  on  the  Finances^ 
1862,  7. 


THE  NATIONAL  BANKING  SYSTEM.  40! 

suit,  for  the  independent  Treasury  afforded  no  adequate  fund 
of  coin  for  keeping  afloat  such  a  mass  of  paper  as  Mr.  Chase 
proposed  to  put  into  circulation. 

This  suspension,  less  than  six  months  after  the  first 
serious  conflict  at  Bull  Run,  opened  the  way  for  the  long 
experience  of  irredeemable  paper  currency  which  ended  only 
with  the  resumption  of  specie  payments  on  January  i,  1879. 
The  legal  tender  notes,  which  followed  quickly  on  the  heels 
of  the  demand  notes,  changed  the  standard  of  value  in  the 
United  States,  drove  gold  across  the  ocean  or  into  private 
hoards,  deprived  us  of  foreign  help  and  sympathy,1  advanced 
prices  from  one  hundred  to  two  hundred  per  cent. ,  and  added 
enormously  to  the  profits  of  speculators  and  to  the  costs  of 
the  war  to  the  people  of  the  country.  The  price  of  gold 
advanced  steadily  from  the  suspension  of  specie  payments 
until  the  summer  of  1864,  when  it  touched  285.  The  whole- 
sale prices  of  nearly  all  articles  climbed  upward  with  the 
gold  premium  and  retail  prices  in  many  cases  advanced  still 
more,  increasing  the  paper  cost  of  every  contract  for  carrying 
on  the  war.  The  government  was  obliged  to  sell  its  secu- 
rities for  depreciated  paper,  and  to  apply  the  proceeds  to 
settlements  in  the  same  inflated  medium.  A  computation  of 
the  proceeds  of  $2,565,233,591  received  from  the  sale  of  pub- 
lic obligations  for  paper  currency  during  forty-five  months 
ending  September  30,  1865,  put  the  gold  value  at  $1,705,- 
347,632,  representing  a  loss  to  the  government  by  its 
depressed  credit  of  $860,000,000,  or  more  than  the  entire 
bonded  debt  left  in  force  at  the  beginning  of  the  fiscal  year 
i889.2 

There  have  always  been  those  who  have  maintained  that 
the  suspension  of  specie  payments  was  a  necessary  condition 

1  In  the  case  of  America  there  was  a  further  evil  ;  being  a  new  coun- 
try, she  ought  in  her  times  of  financial  want  to  borrow  of  old  coun- 
tries ;  but  the  old  countries  were  frightened  by  the  probable  issue  of 
unlimited  inconvertible  paper,  and  they  would  not  lend  a  shilling. — 
Bagehot,  The  English  Constitution,  Ch.  i.,  Works,  IV.,  46. 

2  H.  C.  Adams,  "  American  War  Financiering,"  Pol.  Sc.  Qrly.,  Sep- 
tember, 1886,  I.,  374. 

26 


4O2         HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

of  war.  The  managers  of  the  associated  banks  of  the  East 
recognized  no  such  necessity  until  Secretary  Chase  began  to 
flood  the  country  with  government  paper  money  for  which 
he  had  no  means  of  redemption.  They  pointed  out  that 
transactions  to  the  amount  of  $20,000,000  were  settled  daily 
in  New  York,  without  coin  or  even  notes  and  that  the  settle- 
ment of  an  additional  one  or  two  million  dollars  daily  for 
the  government  could  be  easily  effected  by  the  same  ma- 
chinery. It  was  only  necessary  that  the  government  should 
have  in  hand  at  any  one  time  enough  currency,  even  if  it 
insisted  upon  coin,  for  the  transactions  of  a  few  days,  while 
the  means  of  giving  mobility  to  the  capital  and  resources  of 
the  country  constantly  existed  in  the  hands  of  the  banks. 
When  the  Secretary  showed  himself  immovable  upon  the 
subject  of  issuing  irredeemable  notes,  the  suggestion  was 
made  to  him  that,  if  this  dangerous  path  must  be  trod, 
it  could  be  done  much  more  safely  through  the  banks 
than  directly  through  the  Treasury.  In  the  forcible 
language  of  Mr.  George  S.  Coe,  it  was  represented  to  Mr. 
Chase :  l 

That  if  an  irredeemable  paper  currency  was  the  inevitable  resort,  it 
would  be  more  expedient  and  economical  for  the  government  not 
to  become  involved  in  its  dangers,  but  to  impose  the  duty  and  respon- 
sibility of  issuing  the  notes  upon  the  banks,  who  would  naturally  be 
compelled  to  keep  the  day  of  redemption  continually  in  view.  Thus, 
as  a  suspension  of  coin  payment  was  about  to  be  declared,  it  was  prac- 
ticable to  preserve  from  distribution  and  set  aside  the  forty  millions 
of  coin  then  owned  by  the  banks,  together  with  one  hundred  and  fifty 
or  sixty  millions  of  government  bonds,  which  could  be  taken  by 
them  as  a  special  security  for  two  hundred  millions  of  notes,  which 
could  then  be  immediately  issued  by  the  associated  banks  from  their 
own  plates,  and  be  verified  and  made  national  by  the  stamp  and  signa- 
ture of  a  government  officer.  And  that  such  an  issue,  so  supported 
by  coin  and  bonds,  at  once  simple  and  expeditious,  would  serve  the 
temporary  purpose  required,  with  little  if  any  deterioration  below  coin 
value  ;  and  that  it  would  be  then  practicable  for  the  banks  to  con- 
tinue, without  further  agitation,  their  advances.  But  the  Secretary 
declined  to  entertain  this  suggestion  ;  preferring  the  system  of  na- 
tional banks  which  he  had  already  conceived. 

1  "  Financial  History  of  the  War,"  Bankers'  Magazine,  Jan..  1876. 


THE  NATIONAL  BANKING   SYSTEM.  403 

Secretary  Chase  made  the  fatal  mistake  at  the  outset  of 
relying  upon  loans  to  supply  the  means  of  carrying  on  the 
war  instead  of  appealing  to  the  productive  resources  and 
the  patriotism  of  the  people.  His  recommendation,  at  the 
special  session  of  Congress  in  the  summer  of  1861,  was  to 
raise  $80,000,000  by  taxation  and  $240,000,000  by  loans. 
Of  the  amount  raised  by  taxation  $65,000,000  was  required 
for  the  ordinary  expenses  of  the  peace  establishment, 
$9,000,000  was  to  pay  the  interest  on  the  new  debt,  and 
$5,000,000  was  to  go  to  the  establishment  of  a  sinking  fund 
for  its  final  payment.  It  is  no  afterthought  to  declare  that 
this  policy  of  timidity  was  not  approved  by  the  country.  A 
meeting  of  bank  delegates  was  held  in  Washington  on 
January  n,  1862,  which  recommended  a  tax  bill  to  raise 
$125,000,000  in  addition  to  the  usual  duties  on  imports.  A 
resolution  was  introduced  in  the  House  four  days  later  de- 
claring in  favor  of  an  annual  revenue  of  $150,000,000.  This 
resolution  passed  the  House  with  only  five  dissenting  votes, 
and  its  beneficial  effect  was  shown  by  the  advance  of  six 
per  cent,  bonds  from  90  to  107.  The  New  York  Chamber 
of  Commerce,  on  April  24th,  adopted  a  memorial  to  Con- 
gress declaring  "that  the  masses  of  the  people  are  ready 
and  desirous  to  contribute  their  quota  to  the  ordinary  and 
extraordinary  revenues  of  the  country,"  and  that  the 
public  expenditures  demanded  an  annual  revenue  of  at  least 
$250,000,000. 

It  was  not  until  his  annual  report  of  1863  that  Secretary 
Chase  awakened  to  the  importance  of  taxation  as  a  means 
of  supporting  the  public  credit,  and  suddenly  expressed  his 
desire  for  providing  ' '  for  the  largest  possible  amount  of  ex- 
traordinary expenditures  by  taxation."  The  net  ordinary 
receipts,  exclusive  of  loans,  were  $51,919,261  for  the  fiscal 
year  ending  June  30,  1862  ;  $112,094,945  f°r  the  fiscal  year 
1863;  $243,412,971  for  1864;  $322,031,158  for  1865;  and 
$5T9>949.564  for  1866.  If  these  figures  could  have  been 
moved  backwards  a  single  year,  the  effect  upon  the  credit 
of  the  government,  the  price  of  gold,  and  the  depreciation 
of  the  legal  tender  paper  would  have  been  striking,  even 


404         HISTOR  Y  OF  MODERN  BANKS  OF  ISSUE. 

if  the  change  had  not  made  it  unnecessary  to  depart  from  the 
metallic  standard.  It  is  probable  that  of  the  $6,844,571,431 
computed  1  as  the  cost  of  the  war  up  to  the  resumption  of 
specie  payments  in  1879,  $2,000,000,000  could  have  been 
saved  to  the  tax-payers  and  the  public  debt  would  no  longer 
exist.  Outside  and  beyond  these  considerations,  moreover, 
was  the  injury  done  to  depositors  in  savings  banks  and  to 
other  creditors  by  payment  in  a  depreciated  dollar,  and  the 
injury  to  laborers,  whose  wages  were  far  from  keeping  pace 
with  the  advance  in  paper  prices. 2 

It  has  been  necessa^  to  refer  to  the  financial  policy  of 
Secretary  Chase  in  order  to  show  the  conditions  out  of  which 
grew  the  national  banking  system.  The  system  was  a  part 
of  the  Secretary's  policy  of  carrying  on  the  war  by  means  of 
loans,  and  was  intended  to  make  a  market  for  American 
securities  and  to  maintain  their  price.  One  of  the  first  effects 
of  the  suspension  of  specie  payments  was  the  increase  of  the 

1  Bolles,  III.,  244.     Mr.  Edward  Atkinson  computes  the  war  ex- 
penditures for  the  seven  years,  1862  to  1868,  exclusive  of  the  peace 
establishment,  at  $4, 150, 000,000,  of  which  "not  less  than  $2, 200, 000,000 
was  paid  for  war  material  and  supplies,  the  prices  of  which  were 
raised  by  the  depreciation  of  bad  money."     The  average  advance  in 
prices  in  the  four  years  of  war  over  the  prices  of  1860  was  87  per 
cent.,    which  increased  the  cost  of  material  of  war  $1,000,000,000. 
Since  that  time  we  have  paid  more  than  five  per  cent,  interest  for 
thirty  years  on  seven-tenths  of  this  sum,  amounting  to  $1,050,000,000. 
—"The  Cost  of  Bad  Money,"  Harpers  Weekly,  Oct.  12, 1895,  XXXIX., 
964. 

2  Wholesale  prices  followed  the  gold  premium  in   a   majority  of 
cases  at  once  or  at  an  interval  of  about  a  month,  but  the  advances  in 
many  retail  lines  were  undoubtedly  much  more  rapid.     Wholesale 
prices,  moreover,  remained  stationary  for  nearly  a  year  after  the  gold 
premium  began  to  fall,  and  then  only  followed  it  downward  at  long 
removes.     See  the  admirable  article  of  Fred  Perry  Powers,    "The 
Greenback  in  War,"  Pol.  Sc.  Q'rly,  March,  1887,  II.,  79.     Mr.  Atkin- 
son, in  the  article  quoted  above,  computes  the  transfer  of  profits  from 
wage  earners  to  speculators  or  capitalists,  as  the  result  of  the  legal 
tender  laws,  at  $7,000,000,000  in  the  seven  years  1862-68, — $40  per 
head  annually,  or  $120  for  a  family  of  three,  exclusive  of  enhanced 
payments  directly  for  taxes,  out  of  an  average  income  of  about  $450 
per  family. 


THE  NATIONAL  BANKING  SYSTEM.  405 

circulation  of  the  existing  banks.  The  banks  were  very  pru- 
dently conducted  when  the  war  cloud  first  threatened,  but 
they  were  soon  confronted  by  a  real  demand  for  additional 
circulation  to  take  the  place  of  the  gold  which  disappeared 
with  the  suspension  of  specie  payments.  The  circulation 
of  the  country  outside  the  Treasury,  which  had  been 
$448,405,767  on  July  i,  1 86 1,  had  declined  to  $334,697,744 
on  July  i,  1862.  The  entire  mass  of  specie  in  circulation 
on  the  earlier  date,  which  was  $246,400,000,  had  disap- 
peared, except  about  $25,000,000  on  the  Pacific  Coast. 
United  States  notes  and  demand  notes  had  been  pumped 
into  the  circulation  to  the  amount  of  $125,905,665,  but  they 
did  not  fill  the  void  left  by  the  flight  of  gold  and  silver. 
The  scarcity  of  currency  was  more  than  remedied  by  July 
i,  1863,  when  the  total  had  been  swelled  to  $595,394,038, 
of  which  $312,481,418  was  in  United  States  notes  and 
$238,677,218  in  the  notes  of  the  State  banks.  The  circu- 
lation of  the  latter  had  increased  about  $53,000,000  within 
the  year. 

Secretary  Chase  inquired  in  his  first  annual  report  in  the 
autumn  of  1861  whether,  as  the  bank-note  circulation  con- 
stituted a  loan  without  interest  from  the  people  to  the  banks, 
sound  policy  did  not  require  that  the  advantages  of  this  loan 
be  transferred,  in  part  at  least,  from  the  banks,  representing 
only  the  interest  of  the  stock-holders,  to  the  government, 
representing  the  aggregate  interest  of  the  whole  people. 
The  Secretary  suggested  that  Congress  had  power  to  control 
the  credit  circulation,  and  that  circulating  notes  might  be 
issued  under  national  authority  and  secured  by  the  pledge 
of  United  States  bonds.  He  outlined  the  advantages  of  his 
proposed  measure  thus  : 

Its  principal  features  are,  (ist)  a  circulation  of  notes  bearing  a  com- 
mon impression  and  authenticated  by  a  common  authority  ;  (26)  the 
redemption  of  these  notes  by  the  associations  and  institutions  to 
which  they  may  be  delivered  for  issue  ;  and  (36)  the  security  of  that 
redemption  by  the  pledge  of  United  State  stocks,  and  an  adequate 
provision  of  specie. 

In  this  plan  the  people,  in  their  ordinary  business,  would  find  the 


406        HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

advantages  of  uniformity  in  currency  ;  of  uniformity  in  security  ;  of 
effectual  safeguard,  if  effectual  safeguard  is  possible,  against  deprecia- 
tion ;  and  of  protection  from  losses  in  discounts  and  exchanges ; 
while  in  the  operations  of  the  government  the  people  would  find  the 
further  advantage  of  a  large  demand  for  government  securities,  of  in- 
creased facilities  for  obtaining  the  loans  required  by  the  war,  and  of 
some  alleviation  of  the  burdens  on  industry  through  a  diminution  in 
the  rate  of  interest,  or  a  participation  in  the  profit  of  circulation, 
without  risking  the  perils  of  a  great  money  monopoly.1 

The  Committee  of  Ways  and  Means  of  the  House  of 
Representatives  set  to  work  upon  a  bill  and  made  a  careful 
study  of  the  banking  laws  of  the  various  States.  The  Secre- 
tary's scheme  was  based  upon  the  New  York  free  banking 
law  and  had  been  urged  upon  Mr.  Chase  as  early  as  August, 
1 86 1,  by  Mr.  O.  B.  Potter  of  that  State.  Some  improvements 
on  the  New  York  plan  were  incorporated  in  the  bill  of  the 
committee.  The  provisions  relating  to  the  reserve  fund  were 
drawn  largely  from  the  banking  laws  of  Louisiana,  and  other 
features  were  adapted  from  the  laws  of  Ohio  and  Illinois. 
It  was  pointed  out  early  in  the  public  discussion  of  the  plan 
that  the  volume  of  circulation  would  depend  upon  the  price 
of  bonds  rather  than  upon  the  needs  of  the  money  market, 
and  opposition  was  pronounced  among  the  New  York  bank- 
ers. Thaddeus  Stevens  reported  against  the  bill,  and  its 
necessity  was  postponed  for  the  time  being  by  the  issue  of 
legal  tender  notes.  Mr.  Chase  returned  to  the  subject  in  his 
annual  report  for  1862,  and  his  language  in  favor  of  basing 
the  monetary  circulation  on  evidences  of  the  public  debt 
sounds  very  like  that  adopted  by  Mirabeau,  in  urging  the 
issue  of  the  assignats  upon  the  French  Assembly.2  The 
Secretary  declared : 

Every  dollar  of  circulation  would  represent  real  capital,  actually 
invested  in  national  stocks,  and  the  total  amount  issued  could  always 
be  easily  and  quickly  ascertained  from  the  books  of  the  Treasury. 
These  circumstances,  if  they  might  not  wholly  remove  the  tempta- 
tion to  excessive  issues,  would  certainly  reduce  it  to  the  lowest  point, 
while  the  form  of  the  notes,  the  uniformity  of  devices,  the  signatures 

1  Report  on  the  Finances,  1861,  19. 

2  Vide  Ch.  xxiii. 


THE  NATIONAL  BANKING  SYSTEM.  407 

of  national  officers,  and  the  imprint  of  the  national  seal  authenticating 
the  declaration  borne  on  each  that  it  is  secured  by  bonds  which  re- 
present the  faith  and  capital  of  the  whole  country,  could  not  fail  to 
make  every  note  as  good  in  any  part  of  the  world  as  the  best  known 
and  best  esteemed  national  securities.1 

The  time  was  more  nearly  ripe  for  such  a  device  than  in 
the  preceding  session,  and  a  bill  was  promptly  introduced 
in  the  House  by  Mr.  Hooper  of  Boston,  who  had  given  much 
attention  to  the  subject  during  the  summer.  Senator  Sher- 
man introduced  a  similar  measure  in  the  upper  branch, 
which  was  passed  and  went  to  the  House  on  February  i2th. 
Much  of  the  argument  in  the  Senate  was  based  upon  the 
fact  that  the  existing  banks  were  increasing  their  circulation, 
without  the  restraining  influence  of  specie  payments,  and 
were  using  the  constantly  swelling  volume  of  government 
paper  money  as  a  means  of  redemption.  The  debate  in  the 
House  was  opened  by  Mr.  Spalding  of  New  York,  who  had 
enjoyed  the  doubtful  honor  of  fathering  the  legal  tender  law. 
The  bill  passed  the  Senate  by  a  vote  of  23  to  21  ;  passed  the 
House  on  February  2oth  by  a  vote  of  78  to  64,  and  received 
the  signature  of  the  President  on  February  25,  1863.  The 
measure  proved  to  be  defective  in  some  of  its  details,  how- 
ever, and  was  superseded  by  the  Act  of  June  3,  1864.  Banks 
to  the  number  of  134  had  been  organized  when  the  Comp- 
troller of  the  Currency  made  his  first  report  in  November, 
1863,  but  no  notes  appeared  until  late  in  December.  The 
system  was  hardly  in  operation,  therefore,  until  the  war  was 
within  a  year  of  its  end,  but  the  fact  that  it  had  been  au- 
thorized undoubtedly  contributed  to  create  a  market  for 
securities  and  to  maintain  their  price. 

The  essential  feature  of  the  new  banking  law,  so  far  as 
concerns  circulation,  was  the  provision  that  circulating  notes 
should  be  issued  by  the  Comptroller  of  the  Currency  upon 
deposits  of  United  States  bonds,  to  the  amount  of  ninety  per 
cent,  of  the  face  value  of  the  bonds.  No  bank  could  be 
organized  with  a  less  capital  than  $100,000,  except  in  places 
with  a  population  not  exceeding  six  thousand,  where  a 

1  Report  on  the  Finances,  1862,  18. 


408         HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

bank  might  be  organized,  with  the  approval  of  the  Secre- 
tary of  the  Treasury,  with  a  capital  of  not  less  than  $50,000. 
At  least  fifty  per  cent,  of  the  capital  was  required  to  be  paid 
up  before  beginning  business  and  the  remainder  in  instal- 
ments of  ten  per  cent,  of  the  whole  amount  of  the  capital 
at  the  end  of  each  month.  The  bond  deposit  was  fixed  at 
not  less  than  $30,000  nor  less  than  one-third  the  capital 
stock.  Provision  was  afterwards  made  by  the  Act  of  June 
20,  1874,  for  the  withdrawal  of  circulating  notes  at  the 
option  of  the  banks  and  the  surrender  of  an  equivalent 
amount  of  bonds  by  the  Treasury,  provided  that  the 
amount  of  bonds  on  deposit  should  not  be  reduced  below 
$50,000.  The  limit  was  further  reduced  in  1882,  for  banks 
having  a  capital  of  $150,000  or  less,  to  one-fourth  of  their 
capital  stock,  but  limitations  were  set  upon  both  the  retire- 
ment and  the  issue  of  new  circulation.  The  withdrawal  of 
currency  was  not  permitted  to  proceed  at  the  rate  of  more 
than  $3,000,000  per  month  for  the  entire  country,  and  a 
bank  reducing  circulation  was  not  entitled  to  receive  any 
increase  for  the  period  of  six  months  from  the  time  it  made 
a  deposit  of  lawful  money,  in  lieu  of  the  bonds,  for  the 
redemption  of  outstanding  notes.1 

The  new  banking  currency  was  put  upon  the  same  depre- 
ciated paper  basis  as  the  bonds  and  legal  tender  notes  of  the 
government.  It  could  not  have  circulated  otherwise  in  com- 
mon with  United  States  notes,  for  it  would  have  been  at  a 
premium,  like  gold,  or  would  have  been  presented  to  the 
banks  for  redemption  in  gold  for  hoarding.  The  law  made 
the  notes  redeemable  in  "  lawful  money."  Redemption  of 
this  sort  was  simply  the  exchange  of  a  note  secured  by  one 
government  obligation  for  another,  and  was  of  so  little  value 
that  the  banks  were  seldom  troubled  by  the  presentation  of 
their  notes,  although  they  were  required  to  carry  large  quan- 


limitation  proved  troublesome  to  a  few  banks  which  desired 
to  take  out  circulation  quickly  during  the  panic  of  1893.  The  limi- 
tation upon  taking  new  circulation  was  repealed  by  the  Act  of  March 
14,  1900,  and  the  limit  upon  withdrawals  was  increased  to  $9,000,000 
ptr  month  by  the  Act  of  March  4,  1907. 


THE  NATIONAL  BANKING  SYSTEM.  409 

tities  of  legal  tenders  as  a  part  of  their  lawful  reserve.1  The 
banks  in  Albany,  Baltimore,  Boston,  Cincinnati,  Chicago, 
Cleveland,  Detroit,  Louisville,  Milwaukee,  New  Orleans, 
New  York,  Philadelphia,  Pittsburg,  St.  Louis,  San  Fran- 
cisco, and  Washington  were  required  to  keep  a  reserve  in 
lawful  money  equal  td  twenty-five  per  cent,  of  their  aggregate 
notes  in  circulation  and  deposits.  Banks  outside  of  these 
' '  reserve  cities  ' '  were  required  to  keep  a  reserve  of  at  least 
fifteen  per  cent.,  but  three-fifths  of  the  reserve  in  these  cases 
might  be  deposited  with  banks  in  the  "reserve  cities." 

Hugh  McCulloch  was  the  first  Comptroller  of  the  Cur- 
rency appointed  under  the  new  law,  and  it  is  to  his  ability 
and  good  judgment  that  much  of  the  success  of  the  new 
banking  system  was  due.  He  had  been  president  of  the 
admirably  managed  Bank  of  the  State  of  Indiana,  and  went 
to  Washington  in  1862  to  oppose  the  national  banking  bill. 
His  opinions  underwent  a  change  after  the  bill  was  amended 
in  the  following  year  and  became  a  law,  but  it  was  with 
some  surprise  that  he  received  the  invitation  to  become  the 
head  of  the  new  system.  He  stipulated  for  absolute  control 
over  the  choice  of  his  employees  and  for  permission  to  re- 
sign the  place  as  soon  as  the  system  was  well  organized. 
The  First  National  Bank  of  Philadelphia  was  the  first  au- 
thorized to  begin  business,  on  June  20,  1863.  Several  other 
certificates  were  issued  on  the  same  day,  but  the  Western 
banks  were  generally  more  prompt  to  come  into  the  national 
system  than  those  of  the  East.  Mr.  McCulloch  discusses 
some  of  the  objections  to  the  new  system  and  the  manner  in 
which  he  met  them,  in  the  following  passage  of  his  me- 
moirs : 


1  It  was  the  distinct  proposal  of  Secretary  Chase  that  the  notes 
should  be  payable,  "after  resumption,  in  specie,  by  the  assdciation 
which  issues  them,  on  demand  ;  and  if  not  so  paid  will  be  redeema- 
ble at  the  Treasury  of  the  United  States  from  the  proceeds  of  the 
bonds  pledged  in  security." — Report  on  the  Finances,  1862,  17.  But 
this  safeguard  was  not  adopted,  and  the  banks  continued,  long  after 
resumption  by  the  Treasury,  to  redeem  their  notes  only  in  paper 
money. 


4 TO        HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

There  were  four  causes  for  the  unwillingness  of  the  State  banks  to 
become  national  banks. 

First :  The  apprehension  that  the  national  system  might  prove  to 
be  a  repetition  of  the  free-bank  system  of  the  West,  which  had  been  a 
disreputable  faihire. 

Second  :  The  opinion  that  in  becoming  national  banks,  and  issu- 
ing notes  secured  by  Government  bonds,  their  interests  would  be  so 
identified  with  the  interests  of  the  Government,  their  credit  so  de- 
pendent upon,  so  interwoven  with,  the  public  credit,  that  they  would 
be  ruined  if  the  integrity  of  the  Union  should  not  be  preserved. 

Third  :  the  danger  of  hostile  legislation  by  Congress,  or  the  annoy- 
ances to  which  they  might  be  exposed  by  Congressional  interference 
with  their  business  for  partisan  purposes. 

Fourth  :  The  requirement,  that  in  order  to  become  national  banks, 
they  must  relinquish  the  names  to  which  they  had  become  attached, 
and  be  known  by  numerals. 

I  had  no  great  difficulty  in  satisfying  the  bankers  with  whom  I  had 
personal  interviews  or  correspondence  that  three  of  these  objections 
were  unsubstantial.  In  answer  to  the  first,  I  pointed  out  the  impor- 
tant particulars  in  which  the  national  system  differed  from  the  free- 
bank  system  of  the  West,  in  the  requirement  that  the  capitals  of  the 
national  banks  should  be  real,  and  fully  paid  up;  that  their  circula- 
tion was  to  be  secured  by  United  States  bonds,  with  ten  per  cent, 
margin  ;  that  in  case  of  the  failure  of  a  bank,  its  notes  would  be  at 
once  redeemable  at  the  United  States  Treasury  ;  that  all  the  banks 
would  be  subjected  to  frequent  examinations  by  men  appointed  by 
the  Treasury  Department.  In  answer  to  the  second,  I  took  the 
ground  that  the  interests  of  the  State  banks  were  already  so  involved 
with  those  of  the  Government,  that  the  fate  of  the  latter  would  be  the 
fate  of  the  former  also  ;  that  whether  they  remained  State  banks  or 
became  national,  they  would  stand  or  fall  with  the  Government.  In 
answer  to  the  third,  I  expressed  the  opinion  that  there  was  as  little 
to  fear  from  Congressional  as  from  State  legislation  ;  that  if  there 
was  trouble  to  be  apprehended  in  either  direction,  it  would  be  in  the 
control  which  the  banks  might  have  over  Congress,  rather  than  in 
annoying  interference  by  Congress  with  their  legitimate  business. 
To  the  fourth  I  could  make  no  reply.  It  seemed  to  me  to  be  unrea- 
sonable that  the  State  banks  should  be  required,  in  order  to  be  con- 
verted into  national  banks,  to  surrender  the  names  that  had  been 
made  honorable  by  the  manner  in  which  their  business  had  been 
conducted,  and  accept  for  a  name,  a  number.1 


Men  and  Measures  of  Half  a  Century r,  168,  169. 


THE  NATIONAL  BANKING  SYSTEM.  41  I 

The  last  point  was  finally  conceded  by  the  Secretary,  and 
banks  were  allowed  to  retain  their  old  names  with  the  pre- 
fix "national."  When  this  was  yielded,  says  Mr.  McCul- 
loch,  "they  came  into  the  national  system  with  a  rush,— 
Boston,  as  is  her  wont  in  all  enterprises,  taking  the  lead." 
An  Act  was  passed  in  1873  forbidding  the  use  of  the  word 
"  national ' '  in  the  titles  of  banking  institutions  not  organized 
and  transacting  business  under  the  National  Currency  Act. 

The  destruction  of  the  State  banks  as  banks  of  issue  by 
taxation  was  not  a  component  part  of  the  national  banking 
system  at  its  origin.  Secretary  Chase,  in  his  first  annual 
report,  suggested  the  possibility  of  taxation,  in  order  to 
transfer  to  the  government  some  of  the  profits  of  circulation, 
and  he  remarked,  in  his  second  annual  report  for  1862,  that 
he  had  ' '  heretofore  advised  the  imposing  of  a  moderate  tax 
on  corporate  circulation,  and  now  renews  the  recommenda- 
tion as  the  best  means  of  reduction  and  gradual  substitu- 
tion." The  first  banking  act  provided  that  any  State  bank 
holding  United  States  bonds  to  the  amount  of  fifty  per  cent, 
of  its  capital  stock  might  deliver  them  to  the  United  States 
Treasurer  and  receive  circulating  notes  equal  to  eighty  per 
cent,  of  the  face  value  of  the  bonds  transferred,  and  that 
upon  the  failure  of  such  a  bank  the  bonds  should  be  declared 
forfeited  to  the  United  States  and  the  circulating  notes  should 
be  redeemed  and  paid  at  the  United  States  Treasury.  These 
provisions  for  State  banks  were  omitted  from  the  Act  of 
June  3,  1864,  and  Comptroller  McCulloch,  in  his  annual  re- 
port for  1864,  suggested  the  query  whether  "the  time  has 
not  arrived  when  all  these  institutions  should  be  compelled 
to  retire  their  circulation?  "  He  stated  that  he  had  not  felt 
like  recommending  such  action  "  as  long  as  there  was  any 
uncertainty  in  regard  to  the  success  of  the  national  banking 
system,"  and  he  limited  his  recommendations  to  taxation 
"which  should  be  sufficient  to  effect  the  object  without 
being  oppressive."  '  The  result  was  a  provision  in  the 
Revenue  Act  of  March  3,  1865,  laying  a  tax  of  ten  per  cent. 


Report  on  the  Finance -s,  1864,  54. 


412         HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

per  annum  upon  the  circulation  of  State  banks  paid  out  by 
them  after  July  i,  1866.  This  provision,  therefore,  did  not 
take  effect  until  a  year  after  the  practical  close  of  the  war, 
and  was  intended  to  drive  the  State  banks  out  of  competi- 
tion with  the  national  system  and  to  enlarge  the  market  for 
United  States  bonds. 

There  was  still  in  circulation  on  July  i,  1864,  $179,157,717 
in  State  bank-notes  and  only  $31,235,270  in  national  bank- 
notes. The  State  bank-notes  amounted  to  $142,919,638  on 
July  i,  1865,  three  months  after  Appomattox,  but  had  been 
slightly  surpassed  by  the  national  bank-notes,  which  now 
amounted  to  $146,137,860.  The  arrival  of  the  date  for  the 
enforcement  of  the  ten  per  cent,  tax,  a  year  later,  found 
$19,996,163  in  circulation  in  State  bank-notes  and  $276,012,- 
713  in  national  bank-notes.  The  State  bank-notes  dwindled 
to  $4, 484, 1 12  a  year  later,  and  their  last  appearance  in  the 
Treasury  reports  was  on  July  i,  1876,  when  the  amount  was 
stated  at  $1,047,335.  The  Act  levying  the  ten  per  cent,  tax 
was  several  times  revised  and  was  extended  in  the  Act  of 
March  26,  1867,  to  every  national  or  State  banker  paying 
out  the  notes  of  any  town,  city,  or  municipal  corporation 
after  May  i,  1867.'  The  law  was  finally  re-enacted  by  sec- 
tions 19,  20,  and  21  of  the  Act  of  February  8,  1875,  so  as  to 
apply  the  ten  per  cent,  tax  to  persons,  firms,  or  corporations 


'The  Attorney  General,  on  November  21,  1893,  in  an  opinion  re- 
garding a  clearing  house  certificate  of  deposit,  declared  that  the  paper 
was  "not  within  the  meaning  of  the  statute,"  and  cited  the  rule  of 
law  that  "  If  there  is  any  doubt  as  to  the  meaning  of  the  statute  impos- 
ing this  tax  the  doubt  must  be  resolved  in  favor  of  exemption." — 
Official  Opinions  of  the  Attorneys  General,  XX.,  682.  The  Solicitor 
of  the  Treasury  gave  an  opinion  on  September  28,  1894,  in  regard  to 
a  proposed  issue  of  county  bonds  of  small  denominations  for  use  as  a 
local  currency,  "that  no  statute  of  the  United  States  prohibits  the 
issue  of  county  bonds  in  any  denomination."  He  also  observed  "that 
the  word  '  county '  is  not  enumerated  among  the  corporations,  bank- 
ing associations,  etc.,  mentioned  in  the  statute ;  nor  can  the  word 
'notes'  be  held  to  include  county  bonds."  Both  these  opinions  re- 
ferred to  the  similar  language  of  the  Act  of  February  8,  1875,  then  in 
force. 


THE  NATIONAL  BANKING  SYSTEM.  413 

paying  out  their  own  notes  or  those  of  any  person,  firm,  or 
corporation  other  than  a  national  banking  association. ' 

Several  of  the  States  passed  laws  to  aid  the  State  banks 
in  organizing  under,  the  national  system  and  many  of  them 
made  the  change  during  the  years  1864  and  1865.  The 
number  of  banks  organized  for  the  year  ending  October  31, 
1864,  was  453  with  an  aggregate  capital  of  $79,366,950,  and 
the  number  organized  for  the  year  ending  October  31,  1865, 
was  1014  with  an  aggregate  capital  of  $242,542,982.  This 
was  the  year  during  which  the  impending  levy  of  the  ten  per 
cent,  tax  drove  nearly  all  banks  desiring  to  continue  their 
circulation  into  the  new  system.  The  number  of  organiza- 
tions for  the  year  ending  October  31,  1866,  was  only  62  and 
for  the  next  year  only  10.  The  reorganization  was  accom- 
plished with  little  friction  and  without  arresting  the  ordinary 
business  of  the  banks.  The  stocks  of  many  of  them  increased 
in  value  and  Comptroller  McCulloch  declared  in  1864  that 
he  knew  "of  no  instance  in  which  their  real  market  value 
had  been  injuriously  affected."  Congress  gave  a  preference 
by  an  Act  of  March  3,  1865,  to  State  banks  not  having  over 
$75,000  of  capital  in  entering  the  national  system,  but,  in 
view  of  the  ten  per  cent,  tax  on  their  notes,  it  was  a  rather 
humorous  observation  which  was  made  by  Comptroller 
Clarke,  who  succeeded  Mr.  McCulloch,  that  "  nearly  all  of 
the  State  banks  voluntarily  changed." 

The  original  limit  imposed  on  the  national  bank  circula- 
tion was  $300,000,000,  and  it  was  provided  that  $150,000,000 
should  be  apportioned  to  banks  in  the  States  and  Territories 
according  to  population  and  the  remainder  at  the  discretion 
of  the  Secretary  of  the  Treasury,  writh  due  regard  to  existing 
banking  capital,  resources,  and  business.  Some  conflict 


'These  sections  refer  in  every  case  to  "notes"  or  "circulating 
notes,"  and  Mr.  Edward  Atkinson  of  Boston  has  expressed  the  con- 
viction that  they  do  not  impose  any  tax  upon  certificates  of  deposit 
given  by  national,  State,  or  private  bankers  to  their  depositors,  even 
though  such  certificates  might  be  printed  for  even  amounts  and  used 
for  general  circulation.— Journal  of  Commerce  and  Commercial  Bul- 
letin, Monday,  July  29,  1895. 


414         HISTORY  OF  MODERN  BANKS  OF  fSSUE. 

resulted  between  this  provision  and  that  giving  preference  to 
the  State  banks,  and  the  Comptroller  permitted  the  organi- 
zation of  the  latter  without  limit.  No  stable  State  banks 
existed  in  some  of  the  Western  States,  so  that  their  share 
of  banking  capital  was  reduced  to  a  minimum,  and  the  diffi- 
culty was  increased  with  the  restoration  of  the  Southern 
States  to  the  Union.  The  Act  of  July  12,  1870,  therefore, 
authorized  an  increase  of  $54,000,000  in  the  bank-note  circu- 
lation, to  be  apportioned  to  banks  "  in  those  States  and 
Territories  having  less  than  their  proportion,"  and  a  new 
apportionment  was  directed  to  be  made  as  soon  as  practicable, 
based  upon  the  census  of  1870.  Provision  was  also  made 
for  withdrawing  $25,000,000  of  circulation  from  banks  in 
States  having  an  excess. 

The  withdrawal  of  circulation  was  found  to  be  difficult, 
because  the  notes  did  not  reach  the  banks  or  the  Treasury 
for  redemption.  It  was  only  for  the  interest  of  the  stock- 
holders of  new  banks  to  compel  redemption,  by  paying  a 
premium  to  brokers  to  sort  out  notes  subject  to  withdrawal 
and  send  them  to  the  Treasury.  The  inflation  bill  vetoed 
by  President  Grant  in  1874  contained  a  provision  for  adding 
$46,000,000  to  the  bank-note  circulation.  Congress  took  a 
new  tack  after  the  veto,  and  provided  for  the  withdrawal  of 
$55,000,000  of  circulation  from  States  having  an  excess  and 
its  issue  in  States  having  a  deficiency.  This  Act, — that  of 
June  20,  1874, — was  the  first  to  provide  for  the  voluntary 
retirement  of  circulation  by  the  deposit  of  lawful  money 
with  the  United  States  Treasurer  and  the  return  of  the 
bonds  to  the  bank.  The  panic  of  1873  and  the  redundancy 
of  currency  which  followed,  led  to  the  voluntary  retirement 
of  circulation,  so  that  no  requisitions  upon  the  Eastern 
banks  were  required  to  execute  the  Act  of  1874.  The  Act 
for  the  resumption  of  specie  payments,  approved  January 
14,  1875,  wiped  out  any  specific  limitation  upon  the  amount 
of  national  bank-notes  and  declared  that  "each  existing 
banking  association  may  increase  its  circulating  notes  in 
accordance  with  existing  law  without  respect  to  said  aggre- 
gate limit ;  and  the  provisions  of  law  for  the  withdrawal  and 


THE  NATIONAL  BANKING  SYSTEM.  415 

re-distribution  of  national  bank  currency  among  the  several 
States  and  Territories  are  hereby  repealed." 

The  national  banks  bore  an  honorable  part  in  bringing 
about  the  resumption  of  specie  payments.  A  few  bankers 
who  had  extended  their  speculations  beyond  legitimate 
limits  undoubtedly  desired  to  see  the  regime  of  irredeemable 
paper  perpetuated,  but  the  majority  were  earnestly  in  favor 
of  return  to  a  specie  basis.  Secretary  McCulloch  strongly 
urged  resumption  in  his  first  annual  report  in  1865  and  was 
authorized  by  the  Act  of  April  12,  1866,  to  receive  legal 
tender  notes  for  bonds  and  cancel  the  notes  to  an  amount 
not  exceeding  $10,000,000  in  the  first  six  months  and 
$4, 000,000  in  any  one  month  thereafter.  The  maximum  price 
of  gold,  which  had  been  233.75  *n  ^65,  was  167.75  in  1866 
and  145.625  in  1867.  Secretary  McCulloch  reduced  the  out- 
standing legal  tenders  from  $422,424,007  on  March  31,1866, 
to  $356,000,000  in  February,  1868.  The  fear  of  contraction, 
stimulated  by  the  reaction  from  the  fever  of  the  war  specu- 
lation, seized  upon  Congress  and  the  further  retirement  of 
legal  tender  notes  was  forbidden  by  the  Act  of  February 
3,  1868. 

The  Resumption  Act  was  the  outcome  of  a  caucus  com- 
mittee appointed  by  the  Republicans  in  December,  1874,  to 
frame  a  measure  upon  which  the  party  could  unite.  The 
previous  session  had  witnessed  the  passage  of  the  inflation 
bill,  increasing  the  limit  of  legal  tender  issues  to  $400,000,- 
ooo  and  authorizing  an  addition  of  $46,000,000  to  the  bank- 
note circulation,  to  be  distributed  to  banks  in  the  West  and 
South.  The  bill  was  vetoed  by  President  Grant  and  the 
inflation  fever  was  checked.  The  Resumption  Act  was 
hurried  through  Congress  within  six  weeks  after  the  begin- 
ning of  the  session  and  was  intentionally  left  in  clumsy  and 
ambiguous  shape  in  order  to  hold  votes.  Senator  Schurz  of 
Missouri  repeated!}'  inquired  of  Senator  Sherman,  who  had 
the  bill  in  charge,  whether  the  legal  tender  notes  redeemed 
in  coin,  as  proposed  by  the  bill,  were  to  be  retired  and  can- 
celled. Mr.  Sherman  refused  to  give  a  definite  reply  and 
Mr.  Schurz  voted  with  the  Democratic '  Senators  against 


41  6         HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

the  bill.1  Its  redeeming  feature  was  the  provision  for  the 
resumption  of  specie  payments  at  the  New  York  sub- 
Treasury  on  January  i,  1879,  and  the  issue  of  bonds  to 
obtain  the  necessary  coin. 

The  success  of  specie  resumption  depended  largely  upon 
the  action  of  the  banks.  They  held  more  than  $125,000,000 
in  legal  tender  notes,  of  which  nearly  one-third  was  in  New 
York  City.  A  run  upon  the  sub-Treasury  for  gold  by  means 
of  these  notes  would  have  quickly  compelled  a  new  suspen- 
sion of  specie  payments.  The  subject  of  resumption  was 
discussed  by  the  banks  and  a  committee  was  appointed  to 
confer  with  Secretary  Sherman  and  agree  upon  a  common 
course  of  action  to  sustain  the  public  credit.  The  Assistant 
Treasurer  at  New  York  was  invited  to  become  a  member  of 
the  Clearing  House  and  balances  between  the  banks  and  the 
Treasury  were  proposed  to  be  settled  through  the  Clearing 
House.  The  banks  voluntarily  decided  to  decline  receiving 
gold  as  a  special  deposit,  to  abolish  special  exchanges  of 
gold  checks  at  the  Clearing  House,  and  to  receive  and  pay 
balances  without  discrimination  between  gold  and  legal 
tender  notes.  This  action  dissipated  all  serious  fear  of  the 
success  of  resumption,  and  on  December  17,  1878,  gold  sold 
at  par  in  the  gold  room  of  the  New  York  Stock  Exchange. 
The  banks,  in  the  language  of  Mr.  Bolles,  at  the  beginning 
of  the  war  "parted  with  their  gold  to  aid  the  government, 
and  now,  when  resumption  was  accomplished,  they  were 
content  to  take  whatever  it  desired  to  give."  2 

It  was  the  policy  of  the  Resumption  Act  to.  reduce  the 
volume  of  United  States  legal  tender  paper  at  the  rate  of  80 
per  cent,  of  the  new  national  bank-notes  issued  and  to  con- 
tinue redemption  until  the  legal  tenders  should  be  reduced 
to  $300,000,000.  The  expectation  that  the  bank  currency 
would  rapidly  expand  to  fill  the  void  left  by  the  retirement 
of  the  legal  tenders  was  not  fulfilled.  The  circulation 

1  Mr.  Sherman,  when  Secretary  of  the  Treasury,  resolved  this  doubt 
in  his  annual  report  for  1877,  in  favor  of  re-issuing  the  notes,  but  his 
opinion  was  soon  deprived  of  practical  importance  by  the  resolution 
of  May  31,  1878,  forbidding  the  further  retirement  of  legal  tender  notes. 

*  Financial  History  of  the  United  States,  III.,  301. 


THE  NATIONAL  BANKING  SYSTEM.  417 

secured  by  bonds  reached  a  maximum  of  $350,692,966  on 
December  i,  1873,  and  fell  rapidly  from  that  time  until 
November  i,  1876,  when  the  amount  was  $301,658,372.' 
The  price  of  bonds  as  well  as  the  redundancy  of  currency 
was  beginning  to  exercise  the  restraining  influence  on  bank- 
note circulation  which  in  subsequent  years  forced  it  within 
a  narrow  compass.  The  contraction  of  the  bank-note  cir- 
culation and  the  retirement  of  government  currency  alarmed 
the  advocates  of  an  ample  money  supply  and  led  to  the 
resolution  of  May  31,  1878,  providing  for  a  second  time  that  it 
should  not  be  lawful '  'for  the  Secretary  of  the  Treasury  or  other 
officers  under  him  to  cancel  or  retire  any  more  of  the  United 
States  legal  tender  notes."  The  volume  of  legal  tenders  in 
circulation  on  the  day  the  Act  became  law  was  $346,681,016, 
and  has  remained  rigid  at  this  amount  since  that  date, 
except  for  the  addition  of  the  Treasury  notes  issued  under 
the  Sherman  law  and  the  temporary  retention  of  notes  in  the 
Treasury. 

There  was  a  slight  tendency  to  increase  bank-note  circula- 
tion for  a  time  after  the  revival  of  business  in  i88o,2  but  the 
increase  was  sharply  arrested  in  the  winter  of  1881  by  the 
passage  of  a  bill  requiring  the  banks  to  deposit  a  new  issue 

1  The  aggregate  circulation  on  the  earlier  of  these  dates  was  $352,- 
621,762  and  on  the  later  date  1323,241,308.     The  difference  between 
"  secured  "  and  actual  circulation  is  made  up  by  deposits  of  lawful 
money  with  the  United  States  Treasurer  for  the  redemption  and  can- 
cellation of  notes  still  outstanding,  for  which  the  bonded  security  has 
been  withdrawn  by  the  banks.    This  "lawful  money  "  fund  is  reduced 
as  fast  as  the  notes  are  redeemed  from  it  and  retired,  but  the  with- 
drawal of  bonds  was  so  rapid  that  the  amount  ran  as  high  as  $  107,588, 
447  on  July  i,  1887.     The  fund  stood  at  $54,207,975  when  the  Act  of 
July  14,  1890,  (Section  6)  directed  that  it  "  be  covered  in  to  the  Treasury 
as  a  miscellaneous  receipt"  and  that  redemptions  be  made  thereafter 
from  the  general  cash.     The  notes  outstanding  redeemable  in  lawful 
money  on  September  30,  1908,  were  $48,639,442. 

2  One  of  the  causes  of  the  decline  in  secured  circulation,  as  the  date 
approached  for  the  resumption  of  specie  payments,  was  the  fact  that 
the  price  of  the  bonds  was  falling  in  currency  in  order  to  accommo- 
date itself  to  the  gold  basis.     This  made  it  profitable  to  sell  before 
the  premium  disappeared,  as  the  currency  obtained  for  the  bonds  was 
appreciating  in  value  as  it  approached  parity  with  gold. 


HISTORY  OF  MODERN  BANKS  OF  ISSUE. 


of  three  per  cent,  refunding  bonds  as  security  for  circulating 
notes.  This  limitation  on  the  class  of  bonds  was  accom- 
panied by  a  drastic  provision  repealing  the  authority  to 
reduce  circulation  and  withdraw  bonds.  The  banks  gen- 
erally preferred  to  retain  the  existing  bonds,  paying  higher 
rates  of  interest,  even  with  the  loss  of  circulation,  than  to 
submit  to  such  a  measure,  and  141  banks  hastened  to  deposit 
$18,764,434  in  lawful  money  for  the  retirement  of  their  notes 
and  the  withdrawal  of  their  bonds  in  anticipation  of  the 
enactment  of  the  bill.  The  measure  was  vetoed  by  President 
Hayes,  but  the  result  upon  the  secured  circulation  was  to 
reduce  it  from  $322,654,721  on  February  i,  1881,  to  $305,- 
587,202  on  March  i,  1881.  Many  of  the  bonds  were  de- 
posited again  after  the  adjournment  of  Congress  and  the 
circulation  increased  to  $332,398,922  on  January  i,  1882. 
A  gradual  decline,  whose  results  may  be  observed  in  the 
following  table,  marked  the  history  of  the  secured  circulation 
from  1882  to  1892  : 


JANUARY  1ST. 

AUTHORIZED  CAPITAL 
STOCK. 

CIRCULATION  SECURED 
BY  BONDS. 

TOTAL  NOTES  OUT- 
STANDING. 

1873 

$487,781,551 

$344,582,812 

$347,066,898 

1874 

499,003,401 

348,624,953 

350,848,236 

1875 

503,347,901 

342,333,837 

354,128,250 

1876 

511,155,865 

324,484,539 

346,479,756 

1877 

501,392,171 

3O2,O20,242 

321,595,606 

1878 

485,557,771 

309,890,415 

321,672,505 

1879 

47I,60Q,396 

3I3,2l8,l89 

323,791,674 

1880 

461,557,515 

328,773,639 

342,387,336 

1881 

467,039,084 

322,832,101 

344,355,203 

1882 

470,018,135 

332,398,922 

362,421,988 

1883 

492,076,635 

322,386,120 

362,651,169 

1884 

518,031,135 

310,953,321 

350,482,828 

1885 

529,9IO,l65 

285,496,055 

329,158,623 

1886 

534,378,265 

274,466,748 

317,443,454 

1887 

555,865,165 

2O5,3l6,IO6 

296,771,981 

1888 

584,726,915 

165,205,724 

268,398,878 

1889 

598,239,065 

146,372,588 

233,66O,O27 

1890 

623,791,365 

127,742,440 

197,230,405 

1891 

665,267,865 

I25,66O,36l 

177,287,846 

1892 

685,762,265 

I4O,O84,2O3 

173,078,585 

1893 

695,148,665 

150,526,651           174,404,424 

1894 

693,353,165 

185,194,522           208,538,844 

1895 

670,906,365 

176,667,466           206,513,653 

1896 

664,076,915 

I90,6l6,l60           213,627,821 

THE  NATIONAL  BANKING  SYSTEM. 


419 


It  is  obvious  that  a  currency  system  whose  permanent 
circulation  was  reduced  to  $125,000,000  for  a  population  of 
63,000,000,  had  ceased  to  serve  one  of  the  chief  purposes  for 
which  it  was  created.  The  causes  are  to  be  found  in  the 
rapid  payment  of  the  national  debt,  which  reduced  the  pos- 
sible basis  for  circulation  ;  the  high  price  of  bonds,  which 
reduced  the  profit  on  circulation  ;  and  the  steady  stream 
of  silver  money  which  was  pumped  into  the  monetary  sys- 
tem under  the  laws  of  1878  and  1890,  crowding  out  other 
forms  of  currency.  Hostility  to  the  national  banks,  though 
frequently  expressed  in  the  southern  and  western  parts  of 
the  country,  was  a  result  rather  than  a  cause  of  their  shrink- 
ing circulation.  There  was  filibustering  in  Congress  against 
the  bill  to  extend  their  charters,  but  the  fact  that  their  dis- 
counts and  deposits  remained  unshaken  is  the  best  proof 
that  the  business  community  never  seriously  doubted  that 
the  system  would  survive.  The  original  law  gave  the  banks 
corporate  powers  for  twenty  years  and  the  new  bill  proposed 
their  continuance  for  another  twenty  years.  Mr.  Crapo,  of 
Massachusetts,  who  was  in  charge  of  the  bill  in  the  House, 
failed  twice  to  secure  consideration,  because  under  the  rules 
it  required  a  two- thirds  vote,  but  he  obtained  the  necessary 
votes  on  May  i,  1882,  and  the  bill  passed  the  House  on 
May  iyth,  by  a  vote  of  125  to  67.  It  passed  the  Senate  with 
amendments  on  June  22d  and  became  law  on  July  i2th. 

The  essential  cause  of  diminishing  circulation  was  finan- 
cial rather  than  political  and  was  chiefly  found  in  the  grow- 
ing wealth  and  credit  of  the  country.  The  bonded  debt  of 
the  United  States  shrivelled  from  $1,639,567,750  on  June  30, 
1881,  to  $610,529, 120  on  June  30,  1891,  and  the  result  was 
the  wiping  out  of  two  large  bond  issues  and  almost  the 
extinction  of  a  third.  The  national  banks,  which  had 
$360,488,400  in  bonds  on  deposit  to  secure  circulation  at  the 
earlier  date,  had  only  $142,508,900  on  deposit  at  the  later 
date,  although  the  proportion  to  the  whole  remained  almost 
exactly  the  same.  The  price  of  bonds,  as  secure  gold  invest- 
ments, rose  to  such  a  point  that  their  investment  value  fell 
far  below  three  per  cent.,  and  their  price  was  enhanced  by 


42O         HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

the  large  purchases  by  the  government  in  advance  of  matu- 
rity made  necessary  by  the  enormous  surplus  accumulating 
in  the  Treasury.  These  purchases  of  bonds  at  a  premium, 
exclusive  of  redemptions  at  par  at  maturity,  were  $51,464,300 
for  the  fiscal  year  1888  ;  $120,674,450  for  the  fiscal  year  1889  ; 
$104,546,750  for  the  fiscal  year  1890;  and  $45,175,200  for 
the  fiscal  year  1891 ,  after  which  purchases  ceased.  The  high- 
est average  price  paid  by  the  government  for  four  per  cent, 
bonds  was  128.66  in  1889,  when  $38,106,400  were  purchased. 
The  lowest  average  price  was  124.23  in  1891,  two  years 
nearer  maturity,  when  $42,641,250  were  purchased.  l  These 
bonds  remained,  after  the  maturity  of  the  four  and  a  half 
percent,  loan  in  1891,  the  chief  source  of  security  for  national 
bank-note  circulation,  and  their  price,  including  the  premium, 
could  be  more  profitably  loaned  in  many  cases  in  the  open 
market  than  by  obtaining  ninety  per  cent,  of  the  par  value 
of  the  bonds  in  circulating  notes. Q  The  clamor  of  dema- 
gogues against  the  "double  interest"  derived  from  the 
circulating  notes  and  the  interest  on  the  bonds  was  less 
eloquent  of  the  facts  than  the  steady  withdrawal  of  bonds 
because  circulation  had  ceased  to  be  profitable.  The  increase 
in  circulation  since  1891  has  been  due  to  the  fall  in  the 
premium  on  the  bonds  as  they  have  approached  maturity 
and  to  special  causes,  referred  to  elsewhere,  connected  with 
the  crisis  of  1893  and  the  bond  issues  of  1894,  1895  and 
1896. 

The  effect  of  the  increase  of  the  silver  circulation  under 
the  Bland-Allison  Act  of  1878  and  the  Sherman  compromise 
Act  of  1890,  in  driving  bank-notes  out  of  existence  can  only 
be  roughly  estimated.  It  was  probably  much  less  potent 

1  These  figures  are  taken  from  a  communication  of  Secretary  Car- 
lisle to  the  Senate,  Sept.  26,  1893,  in  response  to  a  resolution  of  that 
body.— Sen.  Ex.  Doc.  18,  Fifty-third  Congress,  ist  Sess. 

*  The  recommendation  was  several  times  made  by  the  Comptroller 
of  the  Currency,  and  embodied  in  bills  introduced  in  Congress,  after 
the  resumption  of  specie  payments,  that  the  banks  be  authorized  to 
issue  circulation  to  the  face  value  of  the  bonds  deposited  as  security, 
instead  of  ninety  per  cent,  of  that  value  ;  and  such  a  provision  was 
finally  made  in  the  Act  of  March  14,  1900. 


THE  NATIONAL  BANKING  SYSTEM.  42  I 

than  the  rise  in  the  price  of  bonds,  and  had  more  effect  in 
expelling  gold  than  bank-notes  from  the  circulation.  The 
Bland  Act,  which  was  passed  over  the  veto  of  President 
Hayes  on  February  28,  1878,  authorized  the  Secretary  of 
the  Treasury  to  purchase  not  less  than  $2,000,000  nor  more 
than  $4,000,000  worth  of  silver  monthly  and  coin  it  into 
standard  silver  dollars  of  412^  grains  each,  nine-tenths 
fine.  Every  Secretary  of  the  Treasury  confined  his  purchases 
closely  to  the  minimum  and  the  aggregate  purchases,  until 
the  act  was  superseded  by  the  Act  of  1890,  were  291,272,019 
fine  ounces,  at  a  cost  of  $308,279,261,  which  was  coined  into 
378,166,793  standard  silver  dollars.  The  Act  of  1890,  which 
was  approved  by  President  Harrison  on  July  i4th,  took  effect 
thirty  days  after  its  passage  and  provided  for  the  monthly 
purchase  by  the  Secretary  of  the  Treasury  of  four  and  a 
half  million  ounces  of  silver  bullion  at  the  market  price, 
and  the  issue  of  Treasury  notes  "  redeemable  on  demand  in 
coin,"  in  payment  for  the  bullion.  The  purchases  under 
this  act  were  168,674,682  fine  ounces  of  silver  at  a  cost  of 
$155,931,002.  These  two  measures  added  to  the  circula- 
tion, therefore,  $534,097,795  in  currency  secured  by  silver, 
although  the  notes  issued  under  the  Act  of  1890  are  redeemed 
in  gold,  and  have  been  treated  in  most  respects  by  the  gov- 
ernment upon  the  same  footing  as  other  United  States  legal 
tender  notes.  The  provision  of  the  Act  of  1890  authorizing 
purchases  of  silver  bullion  was  repealed  on  November  i,  1893, 
but  the  portion  repealing  the  Act  of  1878  was  left  in  force, 
so  that  all  purchases  of  silver  ceased  on  that  date.  The 
currency  in  circulation  outside  the  Treasury  on  that  date 
was  $1,718,544,682,  of  which  $498,121,679  was  stated  to  be 
in  gold  coin,  $78,889,309  in  gold  certificates,  $472,710,610 
in  the  two  forms  of  legal  tender  notes,  $384,443,050  in  silver 
and  silver  certificates,  and  only  $197,745,227  in  national 
bank-notes.  The  bank-notes  formed  less  than  one-eighth 
of  the  circulation,  and  the  $11,566,766  in  the  Treasury 
formed  a  much  smaller  proportion  of  the  money  there  held. 
The  redemption  system  established  by  the  national  bank- 
ing act  of  June  3,  1864,  provided  for  redemption  in  lawful 


422         HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

money  of  the  United  States  at  the  office  of  the  issuing  bank 
and  at  some  designated  bank  in  a  reserve  city.  The  banks 
of  the  reserve  cities  were  required  to  have  a  redemption  agent 
in  New  York.  The  fact  that  the  notes  could  be  redeemed 
only  in  government  paper  money,  which  was  of  no  greater 
value  than  the  notes,  prevented  any  general  movement  for 
redemption  and  gradually  filled  the  channels  of  circulation 
with  worn  and  mutilated  currency.  The  notes  of  the*banks 
distant  from  the  reserve  cities  drifted  only  slowly  into  the 
redemption  agencies  and  they  were  rarely  sent  at  the  expense 
of  the  bank  which  received  them  to  the  issuing  bank  for 
redemption.  Several  propositions  were  made  to  enforce 
prompt  redemption,  but  nothing  was  enacted  into  law  until 
1874.  The  banks  were  required  by  an  act  of  that  year  to 
pay  into  the  Treasury  of  the  United  States  a  fund  equal  to 
five  per  cent,  of  their  circulation,  which  was  to  be  constantly 
kept  good,  for  the  redemption  of  mutilated  notes.  Mutilated 
notes  received  by  any  of  the  banks  or  the  sub-Treasuries 
were  to  be  sent  to  Washington  for  redemption  and  the 
expenses  of  the  entire  redemption  agency  and  of  the  trans- 
portation of  the  notes  were  charged  against  the  banks  and 
then  taken  from  the  five  per  cent.  fund. 

Redemptions  under  the  new  system  have  been  sufficiently 
rapid  to  withdraw  notes  which  are  badly  worn,  but  have  not 
been  rapid  enough  to  give  elasticity  to  the  volume  of  the 
currency.  Where  redemptions  under  the  Suffolk  system, 
with  a  circulation  of  $40,000,000,  were  $400,000,000  per  year, 
redemptions  under  the  national  system  were  never  higher, 
down  to  June  30,  1907,  than  65.84  per  cent,  of  average 
circulation  for  the  year,  and  were  often  below  40  per  cent. 
The  maximum  proportion  was  attained  in  1905,  when  re- 
demptions were  $308, 298, 760  with  an  average  circulation  of 
$468,285,475,  but  the  proportion  of  redemptions  fell  in  1906 
to  55  07,  and  in  1907  to  40. 77  per  cent.  Annual  redemptions 
under  the  Suffolk  system,  therefore,  were  ten  times  the  cir- 
culation, while  those  under  the  national  system  have  been 
less  than  one-half  of  the  circulation.  Economy  of  manage- 
ment was  greatly  in  favor  of  the  Suffolk  system.  For  the 


THE  NATIONAL  BANKING  SYSTEM.  423 

fiscal  year  1907,  under  the  national  system,  with  an  average 
circulation  of  $589,445,599,  and  redemptions  of  $240,314,681, 
the  charges,  exclusive  of  transportation,  were  $160,549,  or 
at  the  rate  of  about  67  cents  per  $1000.  This  rate,  while 
much  lower  than  the  charges  for  earlier  years,  compares  with  a 
charge  per  $1000  under  the  Suffolk  system  of  about  ten  cents. ' 

The  original  banking  act  authorized  the  Comptroller  of 
the  Currency  to  appoint  suitable  persons  to  make  examina- 
tions of  the  affairs  of  the  banks  at  such  times  as  the  Comp- 
troller thought  proper  and  to  make  a  full  report  to  him. 
These  officials  were  to  be  paid  by  the  banks,  but  the  expense 
was  a  charge  levied  by  the  Comptroller,,  and  fixed  by  him, 
so  that  it  did  not  make  the  examiner  in  any  way  subservient 
to  the  bank.  Examinations  were  originally  made  on  an 
average  of  about  once  a  year,  and  other  information  was  ob- 
tained by  the  Comptroller  from  four  reports  of  condition  re- 
quired during  the  year,  not  at  the  end  of  each  quarter,  but 
at  such  dates  as  he  saw  fit  to  designate.  The  frequency  of 
these  reports  was  increased  in  1870  to  five  per  year,  and  the 
examinations  were  gradually  made  more  severe  as  defects  in 
the  existing  system  were  disclosed.  The  same  person  made 
all  the  examinations  within  a  given  district  until  the  spring 
of  1893,  when  Comptroller  Eckels  adopted  the  plan  of  shift- 
ing the  examiners  of  adjoining  districts  from  time  to  time 
and  of  making  two  examinations  during  the  year  instead  of 
one.  The  original  purpose  of  the  system  of  examination 
was  the  protection  of  the  government  and  of  the  stockhold- 
ers against  palpable  fraud,  and  was  not  intended  to  remit  in 
any  degree  the  vigilance  of  the  directors  of  the  banks.  The 
public  came  by  degrees  to  look  more  and  more  to  the  gov- 
ernment examinations  for  the  assurance  of  the  soundness  or 
the  banks,  and  the  system  has  become  one  of  the  most  im- 
portant and  characteristic  features  of  American  banking. 

The  rapid  expansion  of  the  banking  business  of  the  coun- 
try is  indicated  in  the  following,  table,  showing  the  number 

1  Report  on  the  Finances,  1907,  235-37.  Total  cost  of  redemptions 
from  1874  to  1907  was  $5,695,609,  which  included  transportation 
charges  of  about  $2,100,000. 


424         HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

of  national  banks,  with  discounts  and  individual  deposits1 : 


YEAR. 

NO.  OF  BANKS. 

LOANS  AND  DISCOUNTS. 

INDIVIDUAL  DEPOSITS. 

1864 

139 

$    10,666,095 

$    19,450,492 

1865 

638 

166,448,718 

183,479,636 

1866 

,582 

5OO,65O,IO9 

522,507,829 

1867 

,648 

608,771,799 

558,699,768 

1868 

,642 

6l6,603,479 

534,704,709 

I869 

,628 

644,945,039 

568,530,934 

1870 

,6l5 

688,875,203 

546,236,881 

1871 

,648 

725,515,538 

507,368,618 

1872 

,79° 

818,996,311 

596,586,487 

1873 

,940 

885,653,449 

598,114,679 

1874 

,976 

856,816,555 

540,510,602 

1875 

2,027 

955,862,580 

682,846,607 

1876 

2,086 

962,571,807 

618,517,245 

1877 

2,082 

929,066,408 

619,350,223 

1878 

2,074 

881,856,744 

604,512,514 

1879 

2,051 

823,906,765 

643,337,745 

1880 

2,052 

933,543,661 

755,459.966 

1881 

2,095 

,071,356,141 

,006,452,852 

1882 

2,164 

,169,177,557 

,102,679,163 

1883 

2,308 

,230,456,213 

,O66,9OI,7I9 

1884 

2,529 

,307,491,250 

,106,453,008 

1885 

2,664 

,234,202,226 

987,649,055 

1886 

2,732 

,343,517,559 

,111,429,914 

1887 

2,875 

,470,157,681 

,169,716,413 

1888 

3,070 

,583,941,484 

,235,757,941 

1889 

3,150 

,676,554,863 

,331,265,617 

1890 

3,326 

,811,686,891 

,436,402,685 

1891 

3,573 

,932,393,206 

,485,095,855 

1892 

3,692 

,OOI,O32,625 

,602,052,766 

1893 

3,784 

,l66,6l5,72O 

,764,456,177 

1894 

3,787 

,871,^74,769 

,539,399,795 

1895 

3,737 

,974,623,974 

,695,489,346 

1896 

3,706 

2,O2O,96l,792 

,720,550,241 

1897 

3,661 

I,9OI,l6o,IIO 

,639,688,393 

1898 

3,6o7 

2,100,350,318 

1,916,630,252 

1899 

3,59° 

2,214,394,838 

2,225,269,813 

1900 

3,602 

2,479,819,494 

2,380,610,361 

1901 

3,942 

2,706,534,643 

2,623,997,521 

1902 

4,291 

3»038,255,447 

2,964,417,965 

1903 

4,766 

3,350,897,744 

3,159,535,59! 

1904 

5,180 

3,469,195,043 

3,300,619,898 

I9°5 

5,528 

3,728,l66,086 

3,612,499,598 

1906 

5,9JI 

4,071,041,164 

4,088,420,135 

1907 

6,288 

4,463,267,629 

4,115,650,294 

1908 

6,625 

4,585,337,094 

4,105,814,418 

1909 

6,865 

4,840,367,677 

4,720,284,640 

1  These  figures  are  taken  from  the  reports  of  condition  called  for 
by  the  Comptroller,  and  the  dates  are  those  of  the  reports  nearest  to 
the  first  day  of  the  year  for  which  they  are  given. 


THE  NATIONAL  BANKING  SYSTEM.  425 

The  suspension  of  purchases  of  silver  bullion  and  the  issue 
of  circulating  notes  under  the  Sherman  law  left  the  United 
States,  in  view  of  the  limitations  of  the  national  bank-note 
circulation,  without  any  means  of  materially  increasing 
their  currency.  The  importance  of  a  currency  system  more 
adapted  to  commercial  needs,  and  capable  of  greater  expan- 
sion in  the  South  and  West,  was  under  discussion  among 
Democratic  leaders  for  several  years  before  the  panic  of  1893 
and  began  to  assume  definite  shape  during  the  discussion  on 
the  repeal  of  the  Sherman  law.  It  was  believed  by  many 
that  the  clamor  for  the  free  coinage  of  silver  was  largely 
stimulated  by  the  lack  of  an  elastic  circulating  medium  in 
the  newer  sections  of  the  country  and  that  this  clamor 
would  end,  except  in  the  small  silver-producing  States,  if 
such  a  medium  were  provided.  The  democratic  national 
platform,  adopted  at  Chicago,  June  21,  1892,  contained  the 
declaration,  "We  recommend  that  the  prohibitory  ten  per 
cent,  tax  on  State  bank  issues  be  repealed."  This  declara- 
tion was  not  interpreted  by  conservative  members  of  the 
party  in  the  North  as  a  declaration  for  unconditional  repeal, 
and  when  that  question  was  submitted  to  the  House  of 
Representatives  on  June  6,  1894,  it  was  rejected  by  a  vote 
of  102  in  the  affirmative  and  172  in  the  negative,  the  nega- 
tive vote  including  74  Democrats,  nearly  all  from  the  Northern 
States. 

The  necessity  of  some  new  banking  legislation  was  strongly 
urged  upon  President  Cleveland  by  Representative  Gates  of 
Alabama  and  other  prominent  members  of  Congress  while 
the  repeal  of  the  Sherman  law  and  the  tariff  bill  were  pend- 
ing. The  President  spoke  in  an  encouraging  manner  of 
the  necessity  of  currency  reform,  but  he  refrained  from  com- 
plicating the  other  issues  before  Congress  by  any  specific 
recommendations  until  the  meeting  of  the  short  session  on 
December  3,  1894.  The  dissatisfaction  with  the  system  of 
note  issues  authorized  by  the  national  banking  law  and  the 
belief  that  a  different  system  must  be  substituted  had  been 
steadily  growing,  and  the  adoption  of  a  new  system  was 
advocated  by  many  of  the  most  influential  bankers  of  New 


426  H1STOR  Y  OF  MODERN  BANKS  OF  ISSUE. 

York  and  Boston.  A  convention  of  bankers  at  Baltimore 
on  October  18,  1894,  declared  in  favor  of  permitting  the 
issue  of  circulating  notes  by  existing  national  banks  up  to 
the  amount  of  50  per  cent,  of  their  paid-up  capital,  secured 
by  general  assets  and  by  a  guarantee  fund  deposited  by  the 
banks  with  the  United  States  Treasurer.  This  guarantee 
fund  was  to  be  paid  into  the  Treasury  to  the  amount  of  two 
per  cent,  of  the  circulation  of  the  banks  the  first  year  and 
thereafter  at  the  rate  of  one-half  of  one  per  cent,  per  year  until 
the  entire  amount  was  five  per  cent,  of  the  outstanding  circula- 
tion, and  the  government  was  to  have  a  first  lien  upon  all  the 
assets  of  a  failed  bank,  in  order  to  ensure  the  redemption  of 
the  notes  to  the  holders.  An  emergency  circulation  was  also 
authorized  to  the  amount  of  25  per  cent,  of  the  capital,  sub- 
ject to  a  heavy  tax  upon  the  average  amount  outstanding  for 
the  year.  The  exact  rate  of  this  "heavy  tax"  was  not 
specified,  but  its  purpose  was  to  compel  the  retirement  of  the 
* '  emergency  circulation  ' '  when  the  demand  for  money  was 
not  acute  enough  to  justify  a  high  rate  of  interest. 

Manifestations  like  these  paved  the  way  for  the  formal 
presentation  of  the  subject  to  Congress  in  the  message  of 
President  Cleveland  and  the  annual  report  of  Secretary 
Carlisle.  The  President  urged  in  emphatic  language  the 
necessity  of  radical  currency  reform,  but  he  left  the  exposi- 
tion of  the  details  to  his  minister  of  finance.  The  need  of 
action  was  emphasized  by  the  large  exports  of  gold  and  the 
continuous  pressure  of  the  redundant  paper  upon  the  dwind- 
ling gold  reserve.  The  proposals  of  Secretary  Carlisle  for 
currency  reform  may  be  summarized  in  their  important  feat- 
ures as  follows: 

1.  Repeal  all  laws  requiring,  or  authorizing,  the  deposit 
of  United  States  bonds  as  security  for  circulation. 

2.  Permit  national  banks  to  issue  notes  to  an  amount  not 
exceeding  seventy-five  per  centum  of  their  paid-up  and  un- 
impaired capital,   but  require  each  bank  before  receiving 
notes  to  deposit  a  guarantee  fund  consisting  of  United  States 
legal -tender  notes  to  the  amount  of  thirty  per  centum  upon 
the  amount  of  notes  applied  for. 


THE  NATIONAL  BANKING  SYSTEM.  427 

3.  Provide  that  the  circulating  notes  shall  constitute  a 
first  lien  upon  all  assets  of  the  issuing  bank. 

4.  Provide  a  safety  fund  by  taxation  upon  the  banks  for 
the  immediate  redemption  of  the  circulating  notes  of  failed 
banks  and  require  the  legal-tender  guarantee  fund  of  a  bank 
which  fails  to  be  paid  into  the  safety  fund,  the  safety  fund  to 
be  invested  in  United  States  bonds. 

5.  The  Secretary  of  the  Treasury  may,  in  his  discretion, 
use  any  surplus  revenue  of  the  United  States  in  the  redemp- 
tion and  retirement  of  United  States  legal-tender  notes,  but 
such   redemptions  shall   not  exceed   an   amount  equal  to 
seventy  per  cent,  of  the  additional  circulation  taken  out  by 
national  and  State  banks. 

6.  Suspend  the  ten  per  cent,  tax  on  the  circulation  of 
banks  duly  organized  under  the  laws  of  any  State,  transact- 
ing no  other  than  a  banking  business,  and  complying  with 
the  second  and  third  provisions.     The  guarantee  fund  in 
United  States  legal-tender  notes  was  to  be  permitted  to  be 
kept  by  the  State  banks  in  their  own  custody,  but  must  at 
all  times  equal  thirty  per  cent,  of  the  outstanding  circulation. 

Mr.  Carlisle's  bill  was  reported  to  the  House  with  some 
amendments,  but  political  divisions  prevented  its  enactment. 
The  fact  that  the  Fifty-fourth  Congress,  which  met  on 
December  2,  1895,  contained  majorities  politically  hostile  to 
President  Cleveland,  prevented  action  during  the  remainder 
of  his  term  upon  any  plan  of  currency  reform  which  might 
bear  the  stamp  of  an  administration  measure.  The  President 
confined  himself  to  recommending  measures  for  maintain- 
ing the  gold  reserve  and  protecting  public  credit.  Secretary 
Carlisle  simply  renewed  the  recommendations,  repeatedly 
made  in  former  years  by  the  Comptroller  of  the  Currency, 
that  the  banks  be  given  greater  freedom  of  note  issue  by 
permission  to  issue  circulation  to  the  par  value  of  the  bonds 
deposited  as  security,  and  that  the  tax  on  circulation  be  re- 
duced from  one-half  to  one-quarter  of  one  per  cent,  annually. 
He  pointed  out  that  until  1883  there  was  a  tax  upon  the 
capital  and  deposits  of  national  banks,  as  well  as  a  tax  upon 
their  circulation,  and  that  from  all  these  sources  the  govern- 


428  HISTOR  Y  OF  MODERN  BANKS  OF  ISSUE. 

ment  received  up  to  the  close  of  the  fiscal  year  1895  the  sum 
of  $146,902,962.  From  the  tax  on  circulation  alone  the 
receipts  amounted  to  $78,107,006,  while  the  total  estimated 
expenses  of  supervision,  including  salaries  of  officials,  had 
been  only  $15,636,976.  The  average  annual  cost  of  super- 
vision, declared  the  Secretary,  "  has  been  $473,848,  while  a 
tax  of  one-fourth  of  one  per  cent,  on  the  average  annual 
circulation  would  have  yielded  $680,294."  The  Secretary 
also  stated  that  "  The  gain  to  the  government  on  account  of 
national  bank-notes  lost  or  destroyed,  and  which  are  con- 
sequently, never  presented  for  redemption,  is  estimated  to  be 
two-fifths  of  one  per  cent,  upon  the  total  amount  issued,  and 
has,  according  to  this  estimate,  amounted  to  the  sum  of 
$2,805,715."  ' 

The  necessity  for  banking  legislation  which  should  give 
greater  flexibility  to  the  note-issuing  system,  and  protection 
to  the  Treasury,  had  continued  to  be  urged  by  far-sighted 

1  The  amount  of  paper  currency  lost  or  destroyed  and  never  pre- 
sented for  redemption  is  much  smaller  than  is  popularly  believed. 
No  exact  figures  have  ever  been  obtained,  because  notes  of  the  oldest 
issues  are  occasionally  received  for  redemption,  and  even  an  approxi- 
mate estimate  can  be  made  only  upon  issues  of  many  years  standing. 
No  calculation  based  upon  such  issues  has  shown  a  larger  average 
loss,  except  upon  the  small  fractional  currency,  than  one  per  cent, 
and  Secretary  Carlisle's  estimate  of  two-fifths  of  one  per  cent,  is 
probably  not  too  small.  The  percentage  applies,  however,  to  the 
entire  issues  rather  than  to  the  net  amount  in  circulation  at  any  one 
time.  The  entire  issues  of  United  States  notes  up  to  the  close  of  the 
fiscal  year  1895  were  $2,725,981,808,  and  two-fifths  of  one  per  cent,  of 
this  amount  would  be  about  $10,000,000.  The  total  issues  of  national 
bank-notes  to  October  31,  1895,  were  $1,906,918,995,  and  the  propor- 
tion of  estimated  loss  would  be  about  $7,500,000.  This  loss,  however, 
will  not  be  realized  until  all  the  recent  issues  have  been  many  years 
outstanding,  which  accounts  for  the  variation  from  the  estimate  of 
Mr.  Carlisle.  One  of  the  proofs  of  the  small  percentage  of  loss  upon 
paper  currency  is  furnished  by  the  old  demand  notes,  of  which 
$60,030,000  were  issued  and  only  $54,847,  or  less  than  one-tenth  of 
one  percent.,  were  outstanding  on  June  30,  1895.  These  notes,  how- 
ever, having  been  received  for  customs  in  common  with  gold,  did  not 
remain  so  long  in  circulation  as  some  other  forms  of  paper  currency. 
Of  $i  and  $2  notes  in  circulation  in  Canada  on  June  3,  1871,  less  than 
one  per  cent,  were  outstanding  in  1894. — Breckenridge,  337. 


THE  NATIONAL  BANKING  SYSTEM.  429 


financiers  long  after  the  effects  of  the  crisis  of  1893 
passed  away.  The  banking  question  was  overshadowed, 
however,  in  1896,  by  the  determined  effort  of  Southern  and 
Western  Democrats  and  of  the  silver-mining  interests  to  se- 
cure free  coinage  of  silver.  Against  stubborn  resistance  in 
the  East  and  a  sharp  contest  in  the  Southern  States,  the 
silver  element  secured  a  majority  of  the  delegates  to  the 
Democratic  National  Convention  and  adopted  a  resolution 
demanding  *  '  the  free  and  unlimited  coinage  of  both  silver 
and  gold,  at  the  present  legal  ratio  of  16  to  i,  without  wait- 
ing for  the  aid  or  consent  of  any  other  nation.  "  Upon  this 
platform  Mr.  William  J.  Bryan  was  nominated  for  President, 
and  Mr.  Arthur  Sewall  of  Maine  for  Vice-  President.  A 
large  number  of  delegates  from  the  Hast  refused  to  be  bound 
by  the  declaration  for  free  silver  and  subsequently,  in  Sep- 
tember, 1896,  with  other  Democrats  who  were  opposed  to 
free  coinage  of  silver,  held  a  convention  at  Indianapolis, 
which  was  notable  for  the  presence  of  a  majority  of  the  his- 
toric leaders  of  the  party  in  many  of  the  States.  This  con- 
vention nominated  Palmer  and  Buckner. 

The  Republican  candidates  were  WTilliam  McKinley  of 
Ohio  and  Garret  A.  Hobart  of  New  Jersey.  It  was  doubtful 
up  to  the  last  moment  before  the  meeting  of  the  Republican 
Convention  how  positive  would  be  the  Republican  indorse- 
ment of  the  gold  standard,  but  ultimately  the  committee  on 
resolutions  agreed  upon  a  declaration,  which  was  accepted 
by  the  convention,  that,  until  an  international  bimetallic 
agreement  was  attainable,  the  "  existing  gold  standard  must 
be  preserved."  Upon  this  platform  the  Republican  candi- 
dates were  elected,  having  an  immense  popular  majority 
east  of  the  Ohio  River  and  north  of  the  Potomac,  but  a  large 
adverse  majority  in  the  remaining  States  taken  as  a  whole. 

The  election  of  Mr.  McKinley  as  President  did  not  check 
the  demand  for  radical  reform  in  the  monetary  and  banking 
system.  This  demand  dealt  with  three  branches  of  the  sub- 
ject —  the  affirmation  of  the  gold  standard,  the  retirement  of 
the  government  notes,  and  the  adoption  of  a  more  flexible 
bank-note  currency.  In  order  to  crystallize  the  sentiment 


43O       HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

of  the  business  community,  a  movement  was  inaugurated 
in  Indianapolis  to  call  a  general  convention  of  representatives 
of  chambers  of  commerce  and  other  commercial  bodies  to 
deal  with  the  subject.  The  chief  mover  in  this  step  was  Mr. 
Hugh  H.  Hanna  of  Indianapolis,  and  he  became  chairman 
of  the  executive  committee  which  was  charged  with  carrying 
out  the  purposes  of  the  convention.  A  large  convention  was 
held  in  Indianapolis  in  January,  1897,  which  authorized  the 
executive  committee  to  appoint  a  monetary  commission  to 
deal  with  the  subject,  if  such  a  commission  was  not  appointed 
during  the  existing  session  of  Congress.  President  McKinley 
sent  to  Congress  a  message  recommending  the  appointment 
of  a  commission,  but  it  was  not  acted  upon.  Thereupon 
the  Indianapolis  executive  committee  appointed  a  commis- 
sion of  citizens,  composed  of  T.  G.  Bush,  of  Alabama ;  W. 
B.  Dean,  of  Minnesota  ;  ex-Senator  George  F.  Edmunds,  of 
Vermont ;  Charles  S.  Fairchild,  of  New  York,  formerly 
Secretary  of  the  Treasury  ;  Stuyvesant  Fish,  of  New  York, 
President  of  the  Illinois  Central  Railroad  ;  J.  W.  Fries,  of 
North  Carolina  ;  I/>uis  A.  Garnet,  of  California,  formerly 
Director  of  the  Mint ;  Professor  J.  L,aurence  I^aughlin,  Pro- 
fessor of  Political  Economy  at  the  University  of  Chicago  ; 
George  E.  L,eighton,  of  Missouri ;  C.  Stuart  Patterson,  of 
Pennsylvania  ;  and  Judge  Robert  S.  Taylor,  of  Indiana. 

This  commission  completed  its  report  in  December,  1897. 
A  comprehensive  plan  was  presented  for  dealing  with  each 
of  the  three  essential  elements  of  the  problem.  Gold  was 
made  the  standard,  all  obligations  of  the  United  States  were 
made  payable  in  gold,  and  to  carry  out  these  declarations  a 
separate  division  was  created  in  the  Treasury  to  be  called 
the  Division  of  Issue  and  Redemption,  which  was  to  be  the 
custodian  of  the  gold  reserve.  It  was  provided  that  the  re- 
serve should  be  maintained  at  twenty-five  per  cent,  of  the  ag- 
gregate amount  of  United  States  notes  and  Treasury  notes, 
then  amounting  to  about  $453,000,000,  and  also  at  five  per 
cent,  of  the  outstanding  silver  dollars,  then  amounting  to 
$455,000,000.  In  order  gradually  to  retire  the  government 
paper,  it  was  provided  that  United  States  notes  and  Treasury 


THE  NATIONAL   BANKING   SYSTEM.  431 

notes  should  be  cancelled  at  once  to  the  amount  of  $50,- 
000,000,  and  afterwards  in  such  further  amounts  as  should 
not  exceed  the  increase  in  national  bank-note  circulation. 

The  reform  of  the  bank-note  currency  was  provided  for 
upon  a  graduated  scale  extending  over  nine  years.  The 
amount  of  bonds  to  be  required  to  secure  bank-notes  was 
reduced  to  twenty-five  per  cent,  of  the  capital  of  a  bank,  and 
at  the  end  of  five  years  this  requirement  was  to  be  reduced  by 
one-fifth  annually.  Thus  circulation  was  gradually  to  be  re- 
lieved from  its  relation  to  the  bonds,  but  it  was  to  be  protected 
in  the  case  of  failed  banks  by  a  guaranty  fund,  made  up  at 
first  of  a  deposit  in  gold  coin  of  five  per  cent,  of  the  amount 
of  all  notes  issued  and  afterwards  maintained  by  a  graduated 
tax  on  circulation.  This  tax  was  not  to  be  imposed,  except 
at  a  nominal  rate,  upon  notes  up  to  sixty  per  cent,  of  banking 
capital,  but  was  to  be  at  the  rate  of  two  per  cent,  upon  the 
next  twenty  per  cent,  of  notes,  and  six  per  cent,  upon  notes 
in  excess  of  eighty  per  cent,  of  capital. l 

A  bill  carrying  out  this  plan  was  introduced  in  Congress 
and  was  the  basis  of  a  measure  reported  by  Representative 
McCleary  of  Minnesota  in  June,  1898.  A  petition  to  the 
Speaker  of  the  House,  asking  consideration  of  this  measure, 
was  signed  by  146  of  the  206  Republican  members  of  the 
House ;  but  it  was  late  in  the  session  when  this  stage  was 
reached,  and  upon  the  promise  of  President  McKinley  that 
the  subject  should  be  taken  up  with  the  party  leaders  at  the 
following  session  of  Congress  in  December,  further  effort  to 
secure  action  was  postponed  until  that  time.2  A  Republican 

1  Preliminary  Report  of  the  Monetary  Commission,  49-58.     This  re- 
port was  also  printed  substantially  in  full  in  Sound  Currency,  Jan- 
uary i,  1898,  V.,  1-16.   The  work  of  the  Commission  was  explained  in 
an  article  by  Mr.  Fairchild,  one  of  its  members,  in  the  North  American 
Review \  for  February  i,   1898 ;  also  reprinted  in  Sound  Currency 
February  i,  1898,  V.,  25-32. 

2  It  is  declared  by  Mr.  Hepburn  that  "  The  Spanish  War,  which  oc- 
curred at  this  time  (1898),  united  the  patriotic  support  of  the  country 
in  favor  of  the  administration.     Republicans  no  longer  entertained 
any  doubt  of  McKinley's  re-election  and  assumed  a  bolder  attitude 
in  favor  of  the  gold  standard." — The  Contest  for  Sound  Money ',  400. 


43 2       HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

caucus  of  members  of  the  House,  held  in  February,  1899, 
authorized  the  appointment  of  a  committee  by  its  chairman 
to  frame  a  measure  before  the  meeting  of  the  next  Congress  in 
December,  1899.  This  committee  met  at  Atlantic  City  in 
April,  while  the  Republican  members  of  the  Senate  Committee 
on  Finance  met  during  the  summer,  and  each  presented  a 
measure  early  in  the  following  session.  In  the  House  the 
caucus  bill  was  passed  on  December  i8th  by  a  vote  of  190  to 
150.  In  the  Senate  action  was  somewhat  more  deliberate, 
but  a  measure  was  passed  on  February  15,  1900,  by  a  vote 
of  46  to  29.  A  conference  was  held  on  the  differences  be- 
tween the  two  measures,  and  out  of  this  conference  emerged 
the  Gold  Standard  Act  of  March  14,  1900. 

The  Act  of  1900  did  not  essentially  change  the  basis  of 
the  bank-note  currency  and  did  not  provide  for  retiring  the 
government  notes.  In  establishing  the  gold  standard,  how- 
ever, and  providing  for  its  maintenance,  it  followed  in  the 
main  the  lines  laid  down  by  the  Indianapolis  Commission, 
except  that  it  failed  to  provide  for  the  redemption  of  standard 
silver  dollars  in  gold.  A  Division  of  Issue  and  Redemp- 
tion was  established  in  the  Treasury,  in  accordance  with  the 
Indianapolis  plan.  The  gold  reserve  was  definitely  fixed  at 
$150,0x30,000,  and  was  to  be  maintained,  if  necessary,  by  the 
sale  of  three  per  cent,  gold  bonds.  All  the  bonded  obliga- 
tions of  the  United  States  were  made  payable  in  gold.  Lim- 
itations were  imposed  upon  the  denominations  of  paper 
currency,  with  a  view  to  converting  silver  certificates  into 
denominations  below  $10,  and  the  greenbacks  into  notes  for 
$10  and  higher  denominations,  leaving  the  minimum  denom- 
inations of  gold  certificates,  as  under  previous  law,  at  $20.  * 


1  The  great  demand  for  small  notes  arising  in  the  period  of  business 
expansion  which  culminated  in  1907  led  to  a  modification  of  these 
provisions,  by  which  the  minimum  denomination  of  gold  certificates 
was  reduced  to  $10  and  authority  was  given  to  the  Secretary  of  the 
Treasury,  whenever  he  deemed  the  supply  of  small  silver  certificates 
insufficient,  to  issue  United  States  notes  of  the  denominations  of  $i, 
$2,  and  $5  in  substitution  for  larger  denominations  to  be  cancelled. — 
Act  of  March  4,  1907,  Sec.  2. 


THE  NATIONAL    BANKING  SYSTEM.  433 

Some  important  changes  were  made  in  the  banking  law, 
but  they  were  not  of  the  character  desired  by  the  Indian- 
apolis Commission.  They  tended  rather  to  perpetuate  and 
encourage  the  existing  system  of  bond-secured  circulation 
by  providing  for  converting  all  the  old  types  of  bonds,  ex- 
cept the  four  per  cents,  of  1925,  into  a  new  issue  running 
for  thirty  j^ears  and  paying  only  two  per  cent.  The  effect  of 
this  provision  was  to  increase  the  circulation  obtainable  upon 
a  given  investment  in  bonds,  because  a  larger  amount  in  two 
per  cents,  could  be  obtained  than  in  bonds  selling  at  a  higher 
premium.  Another  provision  directed  to  the  same  end  was 
that  the  tax  on  notes  secured  by  two  per  cent,  bonds  should 
be  one-half  of  one  per  cent,  per  annum,  instead  of  one  per 
cent.  Still  another  step  designed  to  perpetuate  the  bond 
secured  circulation  by  making  it  more  attractive  to  the  banks 
was  to  allow  notes  to  be  issued  to  the  par  value  of  the  bonds 
deposited  instead  of  to  only  ninety  per  cent,  of  par. 

Under  the  stimulus  of  these  provisions  of  law  a  new  di- 
rection was  given  to  the  movement  of  the  national  bank- 
note circulation.  It  had  shown  a  declining  tendency  prior 
to  1892,  which  was  checked  to  only  a  moderate  degree  in 
the  next  few  years  by  the  demand  for  currency  and  by  the 
issue  of  several  new  classes  of  bonds.  The  bank-note  cir- 
culation stood  on  March  i,  1900,  shortly  before  the  passage 
of  the  new  law,  at  $249,516,227.  With  the  advantages  af- 
forded by  the  two  per  cent,  bonds,  the  reduction  in  taxation, 
and  the  privilege  of  issuing  to  par,  circulation  increased  by 
about  $90,000,000  before  the  close  of  the  year  1900.  The 
increase  was  less  rapid  for  a  time,  but  again  attained  momen- 
tum in  1903,  and  went  on  almost  without  interruption,  until 
the  reaction  in  the  spring  of  1908  from  the  panic  of  1907. 
Old  bonds  were  exchanged  rapidly  for  the  new  two  per  cents, 
and  there  was  a  steady  tendency  on  the  part  of  national  banks 
to  draw  bonds  from  the  hands  of  private  investors  because 
of  the  small  return  paid  upon  them.1 

1  The  interest-bearing  debt  outstanding  on  October  31,  1907,  was 
$858,685,510,  and  of  this  amount  $676,250,150  was  in  two  percent, 
bonds.  Of  the  latter  $549,788,930  was  deposited  with  the  Treasury 


434         HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

Another  important  feature  of  the  act  of  1900,  which  con- 
tributed in  some  degree  to  increase  the  new  circulation,  but 
still  more  to  increase  the  number  of  national  banks,  was  the 
reduction  of  the  minimum  capital  required  to  create  a  na- 
tional bank  from  $50,000  to  $25,000.  Many  state  banking 
institutions  availed  themselves  of  this  provision  to  enter 
the  national  system.  From  March  14,  1900,  to  October  31, 
1907,  the  number  of  banks  admitted  to  the  national 
system  with  a  capital  of  less  than  $50,000  was  2389,  with 
total  capital  issues  of  $62,312,500  ;  but  of  these  only  1365  were 
primary  organizations,  with  total  capital  of  $35,105,500,  the 
remainder  being  conversions  and  reorganizations  of  state  and 
private  banks. ' 

The  increase  in  circulation  was  stimulated  to  some  extent 
by  the  issue  of  three  per  cent,  bonds  in  1898  to  the  amount 
of  $198,792,660  to  meet  the  expenses  of  war  with  Spain  ;  but 
these  issues  had  been  out  only  about  a  year  and  a  half  when 
the  act  of  March  14,  1900,  permitted  their  conversion  into 
two  per  cents.  By  an  act  of  June  28,  1902,  Congress  author- 
ized the  issue  of  $130,000,000  two  per  cent,  bonds  for  the  con- 
struction of  the  Panama  Canal,  and  of  these  $30,000,000 
was  issued  in  July  1906,  and  $24,088,040  in  December,  1907. 
These  increases  in  the  public  debt  were  offset  by  the  redemp- 
tion of  maturing  four  per  cent,  bonds  in  1907  to  the  amount 
of  about  $61,000,000  ;  but  the  fact  that  the  bulk  of  the  debt 
was  now  in  the  form  of  two  per  cent,  obligations  made  the 
banks  the  chief  holders  of  the  bonds  and  promoted  the  upward 
movement  of  note  circulation.  The  inQuence  of  all  these 
factors— increase  in  the  debt,  conversion  of  old  debt  into  two 


to  secure  note  circulation  and  $78,424,350  to  secure  deposits  of  public 
money  in  the  banks. — Annual  Report  of  the  Comptroller  for  1907, 17. 
1  Annual  Report  of  the  Comptroller  of  the  Currency  for  1907,  30. 
Incorporations  with  capital  less  than  $50,000  rose  by  July  31,  1908,  to 
2557,  with  total  capital  of  $66,610,500.  A  classification  made  May  14, 
1908,  when  the  number  of  these  incorporations  was  2508,  with  capital 
°f  $65,360,500,  showed  the  number  of  banks  in  operation  with  capital 
below  $50,000  to  be  only  2137,  witHi  aggregate  capital  of  $57,613,164. 
The  difference  was  due  largely  to  increases  of  capital  by  small  banks. 


THE  NATIONAL    BANKING    SYSTEM. 


435 


per  cent,  bonds,  more  favorable  conditions  for  issuing  circula- 
tion, and  facility  for  creating  small  banks — may  be  traced  in 
the  following  table  of  national  banking  progress  from  1896  : 

NATIONAL  BANKING  PROGRESS,   1896-1913. 

Two  per 
cent,  bonds 


Oct. 

No. 

Capital. 

Circulation. 

to  secure 

3i. 

Banks. 

circulation. 

1896 

7  67Q 

$6^8  ^od.  QIS 

$2^4  084.  4.4.4. 

o,wy 

MP^'Ot-'»  O^T-,  7  A  O 

NP  ~O  T1  >  x  T"  '  T-^TXT 

1807 

•2.617 

6^8  OIS  2Qt> 

23O,I3I,OO5 

*-^y} 

i  Sob 

O,"-1-  / 

7  Cog 

WO  ,   O,  j*j 
624  e\c\2  IQS 

2^0,620  1^6 

A<jy<J 

l8QQ 

O,O;7<J 
36OI 

w  T~,  OO  ,  ;/O 
6o8,528,O45 

AO7,    -7,  O 

247  066  624. 

*<jyy 
TQXX) 

,  \JVfi 

3,935 

632,502,395 

4iL^£y\J\J\J)\J4.L^ 
331,693,412 

$270,006,600 

1901 

4,279 

663,224,195 

359,911,683 

316,625,550 

1902 

4,678 

713,435,695 

380,476,334 

320,738,000 

1903 

5,H7 

766,367,095 

419,610,683 

376,003,300 

1904 

5,495 

781,126,335 

457,281,500 

416,972,750 

1905 

5,858 

812,026,075 

524,508,249 

483,181,900 

1906 

6,225 

845,939,775 

583,171,985 

506,652,730 

1907 

6,650 

909,274,775 

6O9,98O,46O 

549,788,930 

I908 

6,873 

930,365,275 

665,844,987 

593,259,38o 

1909 

7,025 

964,621,925 

703,940,557 

573,328,450 

1910 

7,218 

1,015,897,135 

724,874,308 

580,145,400 

I9II 

7,33i 

1,032,632,135 

739,l65,3I3 

593,006,600 

1912 

7,428 

1,053,670,435 

749,348,859 

601,762,600 

1913 

7,5i4 

1,068,534,175 

758,899,709 

604,264,950 

The  total  assets  of  the  national  banking  system  rose  on 
January  13,  1914,  to  $11,296,355,138,  of  which  loans  and 
discounts  constituted  $6,175,404,961;  security  holdings, 
$1,020,494,711;  specie,  $780,490,209;  legal-tender  notes, 
$201,429,211;  bonds  of  all  classes  to  secure  circulation, 
$736,600,910.  Individual  deposits  were  $6,072,064,752; 
and  circulation  was  $725,326,161. 

While  the  Gold  Standard  Act  of  1900  marked  an  impor- 
tant stage  in  the  financial  progress  of  the  United  States,  it 
did  not  meet  the  desires  of  the  Indianapolis  Convention  nor 
of  financial  experts  generally  in  giving  elasticity  to  the  bank- 
note circulation.  The  great  prosperity  of  the  country,  how- 
ever, for  the  next  few  years,  and  the  increase  in  the  mone- 
tary circulation  by  the  influx  of  gold,  detracted  somewhat 


436         HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

from  the  interest  felt  by  business  men  in  securing  a  change 
of  law.  The  estimated  gold  stock,  which  was  only  $597,- 
927,254  at  the  close  of  1895,  reached  $1,419,943,124  at  the 
close  of  1905,  and  the  amount  of  gold  in  the  Treasury  in- 
creased during  the  same  period  from  $113,198,707  to  $765,- 
775,099.  This  was  held  largely  against  gold  certificates  in 
circulation,  which  increased  from  $50,099,889  on  December 
31,  1895,  to  $527,493,869  on  December  31,  1905,  and  subse- 
quently to  $767,005,869  on  December  31,  1907.  Pressure 
continued  to  be  felt  every  autumn  in  the  movement  of  the 
crops,  but  was  relieved  for  several  years  by  measures  of 
somewhat  doubtful  legality  or  policy  adopted  by  Mr.  Shaw, 
who  was  Secretary  of  the  Treasury  from  1902  to  March,  1907. 
Among  the  measures  which  had  frequently  been  resorted  to 
on  previous  occasions  was  the  deposit  of  public  money  in 
national  banks.  Mr.  Shaw  increased  the  number  of  such 
depositaries  from  468  on  February  i,  1902,  to  1106  on  Novem- 
ber i,  1906,  and  increased  deposits  during  the  same  period 
from  $106,629,952  to  $148,975, 346.' 

The  novel  features  of  Secretary  Shaw's  policies  were  the 
acceptance  of  bonds  other  than  United  States  bonds  as  se- 
curity for  deposits  of  public  money  ;  exemption  of  the  banks 
from  maintaining  against  public  money  the  legal  reserves 
required  against  other  deposits  ;  the  transfer  to  the  banks  of 
public  money  which  had  already  been  received  into  the 
Treasury  ;  deposits  of  public  money  with  banks  in  anticipa- 
tion of  gold  imports  ;  and  frequent  modifications  of  his  rul- 
ings so  as  to  modify  the  volume  of  bank  circulation  and  of 
public  deposits  as  he  deemed  best.  Several  of  these  measures, 
especially  the  first  and  second,  were  severely  criticised  upon 
legal  grounds,  and  the  Secretary  himself  justified  them  upon 
the  ground  that  in  1902,  "  but  for  what  was  then  done,  a 


1  Finance  Report,  1906,  36.  The  number  of  such  depositaries  was 
further  increased  by  Secretary  Cortelyou  in  1907  to  1421,  but  this 
was  under  a  mandate  of  the  act  of  March  4,  1907,  "That  the  Sec- 
retary of  the  Treasury  shall  distribute  the  deposits  herein  provided 
for,  as  far  as  practicable,  equitably  between  the  different  States  and 
sections." 


THE  NATIONAL   BANKING    SYSTEM.  437 

panic  would  have  ensued  rivalling  in  severity  any  in  our 
history.'*  *  The  New  York  Clearing  House  banks  refused 
to  accept  immunity  from  reserve  requirements,  and  the  policy 
of  deposit  of  public  money  in  the  banks  against  engage- 
ments of  gold  for  import,  which  was  first  adopted  in  1906, 
was  deliberately  abandoned  by  Secretary  Cortelyouin  1907." 

All  these  difficulties  in  the  administration  of  existing  law 
afforded  accumulating  proof  of  the  necessity  for  radical 
changes  in  the  American  monetary  system.  Surplus  reserves 
in  the  New  York  banks,  which  were  impaired  but  once  from 
the  panic  of  1893  to  tne  autumn  of  1902,  fell  below  the  legal 
requirement  in  September  of  that  year,  and  again  twice  in 
1905  and  four  times  in  1906. 8  When  finally,  in  the  autumn 
of  1905,  rates  for  call  money  in  New  York  rose  on  one  occa- 
sion as  high  as  125  per  cent.,  the  deficiencies  of  the  existing 
system  were  again  brought  into  such  prominent  relief  that  it 
was  generally  felt  that  the  time  had  come  for  action.  Mr. 
Jacob  H.  Schiff,  a  well-known  international  banker,  took  the 
lead  in  endeavoring  to  secure  new  legislation  by  the  pre- 
sentation of  a  resolution  to  the  New  York  Chamber  of  Com- 
merce, which  was  adopted  in  December,  1905,  providing  for 
the  appointment  of  a  special  committee  of  the  Chamber  to 
frame  a  currency  measure.  This  committee,  after  consulting 
with  the  heads  of  leading  foreign  banks,  made  a  report  which 
was  adopted  by  the  Chamber  of  Commerce,  November  i, 
1906. 

The  creation  of  a  central  bank  of  issue  was  recommended 
by  the  Chamber  of  Commerce  committee.  It  was  proposed 

1  Finance  Report,  1906,  37. 

9  In  his  response  to  the  Senate  in  regard  to  his  policy  during  the 
panic,  Mr.  Cortelyou  said,  "The  Secretary  did  not  feel  called  upon  at 
any  stage  of  the  crisis  to  interfere  directly  with  the  normal  movement 
of  gold  between  international  markets."  Sen.  Doc.  208,  6oth  Congress, 
ist  Session,  13.  Andrew  declares  that  the  policy  adopted  by  Mr. 
Shaw  "  was  an  objectionable  interference  with  the  free  movement  of 
gold  reminiscent  of  mercantilist  measures  of  the  seventeenth  cen- 
tury."— "The  Treasury  and  the  Banks  under  Secretary  Shaw,"  in 
Quarterly  Journal  of  Economics,  August,  1907,  XXI.,  547. 

3  Andrew,  idem.,  561, 


438         HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

that  such  a  bank  should  be  under  the  direct  control  of  a 
Board  of  Governors  appointed,  at  least  in  part,  by  the 
President  of  the  United  States  and  that  it  should  perform 
some  of  the  functions  imposed  under  existing  law  upon  the 
United  States  Treasury.  The  argument  for  such  an  institu- 
tion was  summed  up  as  follows:  ! 

The  operations  of  central  banks  in  Kurope,  especially  in  France, 
Germany,  Austria-Hungary,  and  the  Netherlands,  make  it  impossible 
to  doubt  that  the  existence  of  such  a  bank  in  this  country  would  be 
of  incalculable  benefit  to  our  financial  and  business  interests.  Such 
a  bank  in  times  of  stress  or  emergency  would  be  able  by  regulation 
of  its  note  issues  to  prevent  those  sudden  and  great  fluctuations  in 
rates  of  interest  which  have  in  the  past  proved  so  disastrous.  Further- 
more, it  would  have  the  power  to  curb  dangerous  tendencies  to 
speculation  and  undue  expansion,  for  by  the  control  of  its  rate  of 
interest  and  of  its  issues  of  notes  it  would  be  able  to  exert  great 
influence  upon  the  money  market  and  upon  public  opinion.  Such 
power  is  not  now  possessed  by  any  institution  in  the  United  States. 
Under  our  present  system  of  independent  banks,  there  is  no  centraliza- 
tion of  financial  responsibility,  so  that  in  times  of  dangerous  over- 
expansion  no  united  effort  can  be  made  to  impose  a  check  which  will 
prevent  reaction  and  depression.  This  is  what  a  large  central  bank 
would  be  in  a  position  to  do  most  effectively.  A  central  note-issuing 
bank  would  supply  an  elastic  currency  varying  automatically  with 
the  needs  of  the  country.  This  currency  could  never  be  in  excess, 
for  notes  not  needed  by  the  country  would  be  presented  for  deposit 
or  redemption. 

In  view,  however,  of  the  political  hostility  supposed  to 
exist  against  a  central  bank,  an  alternative  plan  was  suggested 
for  giving  greater  flexibility  to  the  circulation  of  the  national 
banks.  It  was  proposed  that  any  bank  having  fifty  per 
cent,  of  its  capital  invested  in  United  States  bonds,  against 
which  it  had  circulation,  could  issue  additional  circulation 
in  certain  fixed  proportions  to  capital,  subject  to  a  graduated 
rate  of  taxation.  In  the  case  of  a  bank  with  a  capital  of 
$100,000,  the  circulation  authorized  under  the  plan  proposed 
would  be  as  follows  : 


1  The  Currency  :  Report  of  the  Special  Committee  of  the  Chamber 
of  Commerce  of  the  State  of  New  York,  9. 


THE  NATIONAL   BANKING  SYSTEM.  439 

$50,000  in  notes  secured  by  bonds,  taxed  one-half  of  I  per  cent. 

$5,000  upon  general  assets,  taxed  2  per  cent. 

$5,000  upon  general  assets,  taxed  3  per  cent. 

$5,000  upon  general  assets,  taxed  4  per  cent. 

$10,000  upon  general  assets,  taxed  5  per  cent. 

$10,000  upon  general  assets,  taxed  6  per  cent. 

The  maximum  circulation  authorized  under  this  plan  was 
estimated  at  the  time  of  the  report  at  $289,000,000,  but  this 
was  based  upon  the  ability  of  each  bank  to  issue  the  full 
amount  and  upon  limitation  of  the  bond  circulation  in  each 
case  to  fifty  per  cent,  of  capital,  since  the  provision  of  exist- 
ing law  was  retained,  that  total  circulation  should  not  in  any 
case  exceed  capital.  1 

It  was  proposed  that  all  the  notes  issued  by  a  bank  should 
be  of  the  same  form  and  that  future  issues  of  United  States 
bonds  should  not  be  made  available  as  a  basis  for  the  issue 
of  bank-notes.  The  proposed  issue  was  to  be  protected  in  a 
manner  similar  to  that  proposed  by  the  Indianapolis  plan — 
the  creation  of  a  guaranty  fund  from  the  proceeds  of  taxa- 
tion. It  was  also  proposed  that,  in  order  to  secure  the 
prompt  redemption  of  notes,  when  no  longer  required  in  the 
channels  of  trade,  redemption  agencies  should  be  established 
at  sub- treasuries  and  other  convenient  points. 

The  adoption  of  the  report  by  the  Chamber  of  Commerce 
was  preceded  by  a  few  days  by  action  at  the  annual  conven- 
tion of  the  American  Bankers'  Association  at  St.  Louis. 
This  convention  adopted  a  resolution  authorizing  a  committee 
of  fifteen  members  to  frame  a  currency  measure  and  to  con- 
sult with  representatives  of  the  committee  of  the  Chamber  of 
Commerce.  A  smaller  committee,  headed  by  Mr.  John  L,. 


1  The  maximum  taxed  up  to  four  per  cent,  would  be,  under  the 
Chamber  of  Commerce  plan,  only  about  $124,000,000.  The  amounts 
authorized  under  the  bankers'  plan,  presently  referred  to,  were  about 
$206,500,000  under  a  tax  of  two  and  a  half  per  cent.,  and  $103,250,000 
taxed  five  per  cent.  Vide  article  by  the  present  writer,  "The  Plans 
for  Currency  Reform,"  in  New  York  Bankers'  Magazine  (December, 
1906),  LXXIII.,  897,  seq. 


44O          HIS  TOR  Y  OF  MODERN  BANKS  OF  ISSUE. 

Hamilton,  president  of  the  Bankers'  Association  during 
1906,  had  prepared  a  plan,  which  was  presented  to  the 
convention,  but  it  was  deemed  best  to  secure  harmony  by 
consultation  among  those  interested  in  different  plans,  and 
all  of  the  members  of  the  Hamilton  committee  were  in- 
cluded in  the  membership  of  the  enlarged  committee  of 
fifteen. 

This  committee  met  promptly  in  Washington  in  Novem- 
ber, 1906,  with  the  Hon.  A.  Barton  Hepburn,  president  of 
the  Chase  National  Bank  of  New  York,  as  chairman.  A 
plan  was  prepared  which  did  not  differ  in  principle  from  the 
plan  of  the  New  York  Chamber  of  Commerce,  but  changed 
the  basis  of  circulation  so  that  a  national  bank  might  issue 
an  amount  of  notes  without  bond  security  to  the  amount  of 
forty  per  cent,  of  its  bond-secured  circulation,  but  not  exceed- 
ing twenty-five  per  cent,  of  its  capital.  These  notes  were  to 
be  taxed  at  the  rate  of  two  and  a  half  per  cent,  per  annum . 
An  additional  issue  was  provided  for,  in  order  to  meet  more 
acute  emergencies,  to  the  amount  of  twelve  and  a  half  per 
cent,  of  capital,  subject  to  tax  at  the  rate  of  five  per  cent. 
This  measure  was  introduced  into  Congress  and  was  made 
the  basis  of  a  bill  reported  favorably  by  the  Hon.  Charles  N. 
Fowler,  chairman  of  the  House  Committee  on  Banking, 
who  had  long  taken  a  leading  part  in  the  agitation  for  an 
improved  currency  system.  This  bill  did  not  receive  con- 
sideration, however,  during  the  session  which  ended  on 
March  4,  1907.  At  the  annual  convention  of  the  Bankers' 
Association  held  at  Atlantic  City  in  September,  1907,  the 
report  of  this  committee  was  indorsed  by  a  large  majority 
and  the  committee  was  continued,  with  power  to  adopt  such 
measures  to  secure  legislation  as  it  might  approve. 

Inevitably  the  serious  conditions  of  the  crisis  of  1907 
intensified  the  demand  for  reform.  The  demonstrated  de- 
fects of  the  system  of  banking  isolation  led  to  more  serious 
consideration  than  for  many  years  of  the  project  of  a  central 
bank.  Such  an  institution  was  recommended  by  Mr. 
Ridgely,  the  Comptroller  of  the  Currency,  in  his  annual 
report  to  Congress,  and  received  endorsement  in  other  influ- 


THE  NATIONAL  BANKING  SYSTEM.  44! 

ential  quarters.  Party  leaders  did  not  believe,  however,  that 
public  opinion  was  yet  ripe  for  such  a  measure.  In  the 
Senate  the  Finance  Committee  reported  favorably  a  bill 
introduced  by  Senator  Aldrich  of  Rhode  Island,  extending 
the  system  of  a  bond-secured  note  issue.  This  bill,  as 
reported,  proposed  to  allow  issues  to  a  maximum  amount  of 
$500,000,000,  secured  by  the  deposit  in  the  Treasury  of  State, 
municipal  and  railway  bonds  conforming  to  certain  require- 
ments. '  Such  issues  were  to  be  taxed,  however,  at  the  rate 
of  six  per  cent.,  which  provision,  in  view  of  reserve  require- 
ments, would  make  them  unprofitable  unless  interest  rates 
went  above  eight  per  cent. 

In  the  House  a  measure  of  a  very  different  character  was 
introduced  by  the  Hon.  Charles  N.  Fowler,  Chairman  of  the 
Committee  on  Banking,  and  was  ordered  favorably  reported, 
with  vSome  amendments,  on  February  28,  1908.  This  meas- 
ure provided  for  issues  of  notes  on  the  general  credit  of 
national  banks  to  the  amount  of  their  capital  and  the  retire- 
ment of  notes  issued  under  the  bond-secured  system  ;  but,  in 
order  to  afford  adequate  assurance  of  safety,  banks  were  re- 
quired to  contribute  five  per  cent,  of  both  note  issues  and 
deposits  to  a  guaranty  fund,  which  was  to  ensure  the  prompt 
payment  of  the  deposits  as  well  as  the  notes  of  a  failed  bank. 
Notes  issued  under  the  measure  were  to  be  taxed  at  the  rate 
of  two  per  cent,  per  annum,  and  were  to  be  made  responsive 
to  the  changing  demands  of  business  by  the  creation  of 
twenty  redemption  districts.  A  motive  for  careful  scrutiny 
of  each  bank  by  the  others  in  a  redemption  district  was 
created  by  imposing  one  quarter  of  the  losses,  in  case  of 
failure,  upon  the  banks  of  the  redemption  district,  before 
recourse  to  the  guaranty  fund  ;  a  means  of  making  such 
scrutiny  effective  was  afforded  by  the  creation  of  committees 
elected  by  the  bankers  themselves  in  each  redemption  dis- 
trict with  full  power  of  visitation  and  examination.  The 


1  The  authority  to  issue  notes  on  railway  bonds  was  abandoned  as 
a  part  of  the  bill  by  an  announcement  made  by  Senator  Aldrich  on 
March  17,  1908. 


HISTOR  Y  OF  MODERN  BANKS  OF  ISSUE. 


two  per  cent,  bonds  were  to  be  purchased  for  the  guaranty 
fund,  in  order  to  leave  the  field  clear  for  the  issue  of  securi- 
ties at  a  rate  of  interest  better  adapted  to  keep  them  at  par  in 
the  open  market  in  case  of  war  or  other  emergency.  Pro- 
vision was  also  made  for  the  gradual  retirement  of  United 
States  notes  from  the  surplus  earnings  of  the  guaranty  fund. 

The  bill  of  Senator  Aldrich  passed  the  Senate  late  in 
March,  but  found  so  little  favor  with  the  House  Committee 
on  Banking,  to  which  it  was  referred,  that  it  was  not  re- 
ported back  to  the  House.  Republican  leaders  in  that  body 
felt  that  some  measure  should  be  passed  which  would  afford 
a  safeguard  against  another  suspension  of  currency  payments 
in  time  of  stress  by  providing  for  a  simple  form  of  emer- 
gency circulation.  So  strong,  however,  was  the  opposition 
among  commercial  bodies  to  the  perpetuation  of  the  system 
of  basing  note  issues  upon  long-term  obligations,  instead 
of  upon  the  current  business  of  the  country,  that  a  bill  was 
introduced  in  the  House  by  Representative  Vreeland  of  New 
York  seeking  to  meet  this  objection  in  part.  This  bill  pro- 
vided for  the  creation  of  associations  in  clearing  house  dis- 
tricts, of  which  the  member  banks  were  to  have  the  privilege 
of  issuing  notes  upon  commercial  paper  deposited  with  a 
committee  of  the  association. 

The  Vreeland  bill  was  preferred  by  many  members  to  the 
Fowler  bill  because  it  did  not  involve  a  radical  departure  from 
the  existing  system.  It  was  agreed  upon  by  a  Republican 
conference,  after  various  amendments,  on  May  n,  1908,  by 
a  vote  of  128  to  16,  and  on  May  i4th  passed  the  House  by  a 
vote  of  184  to  145.  All  the  Democrats  voting  and  fifteen 
Republicans  made  up  the  minority.1  The  Senate  on  the 
next  day  substituted  a  modified  draft  of  the  Aldrich  bill  and 
asked  a  conference.  It  was  impossible  at  first  to  secure 
agreement,  but  the  necessity  was  so  strongly  felt  of  adopting 
some  measure  which  would  leave  the  impression  upon  the 
country  that  safeguards  had  been  taken  against  another 
suspension  of  currency  payments,  that  a  substitute  bill  was 
finally  presented  only  two  weeks  before  the  close  of  the 

1  New  York  Journal  of  Commerce,  May  15,  1908. 


THE  NATIONAL  BANKING  SYSTEM.  443 

session  of  Congress  and  was  quickly  passed  through  both 
houses.1 

The  new  measure,  which  became  law  May  30,  1908,  was 
known  as  the  Aldrich-Vreeland  law,  and  was  made  avowedly 
temporary  in  character  by  the  provision  that  it  should  con- 
tinue in  force  only  until  June  30,  1914.  It  authorized  issues 
of  new  bank-notes  to  an  amount  not  exceeding  $500,000,000, 
which  were  to  be  made  homogeneous  in  appearance  and 
character  with  the  old  notes  by  making  the  wording  on  all 
read  that  they  were  * '  secured  by  United  States  bonds  or 
other  securities. ' '  Notes  were  to  be  issued  to  banks  in  any 
one  State  in  the  proportion  that  national  bank  capital  and 
surplus  in  the  State  bore  to  the  total  of  such  capital  and 
surplus  in  the  country,  but  this  provision  was  subject  to 
exceptions.  Notes  authorized  by  the  new  law  could  be 
issued  only  to  national  banks  having  a  surplus  of  twenty 
per  cent,  and  having  already  notes  in  circulation  under  the 
old  law  to  the  amount  of  forty  per  cent,  of  their  capital ;  and 
the  total  amount  of  notes  issued  under  both  the  old  and  new 
laws  was  limited  to  the  combined  capital  and  surplus  of  the 
issuing  bank. 

Two  separate  methods  were  provided  for  obtaining  the 
new  circulation.  The  essential  feature  of  the  original  Aldrich 
bill  was  preserved,  that  circulation  might  be  issued  upon 
direct  application  to  the  Comptroller  of  the  Currency,  "se- 
cured by  the  deposit  of  bonds  other  than  bonds  of  the  United 
States."  This  provision  was  limited  to  State  and  municipal 
bonds,  and  the  amount  which  might  be  issued  was  restricted 
to  ninety  per  cent,  of  the  market  value  of  the  bonds.  The 
other  method  of  obtaining  new  circulation  attracted  the 
greater  degree  of  attention,  because  it  was  a  new  departure 
in  American  currency  legislation  and  was  a  short  step  in 
the  direction  of  basing  note  issues  upon  commercial  assets. 
Under  this  provision  national  banks  were  permitted  to  form 

1  Although  the  new  measure  was  resolutely  opposed  by  Mr.  Fowler 
and  other  advocates  of  a  credit  currency,  the  conference  report  was 
accepted  in  the  House  May  27th  by  a  vote  of  166  to  140,  and  in  the 
Senate  on  May  3oth  by  43  to  22. 


444         HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

national  currency  associations,  which  were  to  pass  upon  the 
applications  of  their  members  for  notes  and  to  support  each 
other  by  a  mutual  guarantee.  The  security  for  the  notes 
in  such  cases  might  be  "  any  securities,  including  commercial 
paper,"  but  notes  could  not  be  based  on  commercial  paper 
to  a  greater  extent  than  thirty  per  cent,  of  the  capital  and 
surplus  of  the  issuing  bank.1  The  term,  "  any  securities," 
left  the  door  open  for  the  acceptance  of  railroad  bonds  or 
any  other  bonds,  stocks,  or  notes  which  might  be  approved 
by  the  officers  of  the  currency  association  and  the  govern- 
ment. The  issue  of  notes  under  these  provisions  was  limited 
to  seventy-five  per  cent,  of  cash  value  in  the  case  of  com- 
mercial paper,  but  was  not  limited  to  the  par  value  of  the 
securities,  as  in  the  case  of  the  notes  issued  directly  by 
the  Treasury. 

That  these  issues  of  notes  should  have  a  purely  emergency 
character  was  sought  by  the  provisions  regarding  taxation. 
Issues  under  the  law  were  to  be  taxed  at  the  rate  of  five  per 
cent,  per  annum,  but  as  the  redemption  fund  deposited  in 
Washington  was  required  to  be  ten  per  cent.,  the  issue  of 
notes  could  not  afford  a  profit  unless  loaned  considerably 
above  the  rate  of  five  and  a  half  per  cent.  Moreover,  the 
rate  of  five  per  cent,  was  increased  after  the  notes  had  been 
in  circulation  one  month  by  an  additional  one  per  cent,  a 
month,  until  after  six  months  the  rate  was  ten  per  cent.1 

The  new  law  contained  a  provision  for  the  appointment  of 
a  National  Monetary  Commission  to  report  "what  changes 
are  necessary  or  desirable  in  the  monetary  system  of  the 
United  States."  This  commission  was  made  up  of  nine 
senators  and  nine  representatives,  with  Senator  Aldrich  and 
Representative  Vreeland  as  chairmen  for  their  respective 
chambers.  This  body  made  a  thorough  examination  of 
foreign  banking  systems,  subcommittees  held  conferences  with 
leading  bankers  at  the  financial  centres  of  Europe,  and  mono- 

1  The  provisions  of  this  act  were  extended  to  June  30,  1915,  by  the 
Federal  Reserve  Act  of  December  23,  1913,  and  the  rate  of  taxation 
on  notes,  which  was  reduced  by  that  act,  was  further  modified  and 
other  changes  were  made,  by  the  act  of  August  4,  1914,  as  described 
in  Chapter  XXVII.,  infra. 


THE  NATIONAL  BANKING  SYSTEM.  445 

graphs  were  prepared  for  the  commission  by  economists  and 
specialists  on  the  banking  systems  of  nearly  every  commer- 
cial country.  A  greater  degree  of  centralization  in  the  func- 
tion of  note  issue  and  in  the  custody  of  the  gold  reserves  of 
the  country  were  the  distinguishing  characteristics  of  the  plan 
which  was  submitted  by  the  commission  to  Congress  in 
January,  1912.' 

This  measure  provided  for  a  central  institution  to  be 
known  as  the  National  Reserve  Association  of  the  United 
States,  which  was  to  issue  all  future  bank-note  circulation. 
The  association  was  to  be  constituted  with  an  authorized 
capital  equal  to  twenty  per  cent,  of  the  capital  of  subscribing 
banks,  of  which  one-half  was  to'be  paid  in  and  the  remainder 
to  be  subject  to  call.  State  banks  and  trust  companies  con- 
forming to  certain  provisions  and  all  national  banks  were 
entitled  to  subscribe  to  the  stock  and  to  become  members  of 
the  association.  The  subscribing  banks  were  to  be  grouped 
into  fifteen  local  associations,  in  the  territory  of  each  of 
which  was  to  be  located  a  branch  of  the  National  Reserve 
Association.  The  principal  functions  of  the  local  association 
were  to  exercise  supervision  over  subscribing  banks  and  to 
see  that  paper  offered  for  rediscount  conformed  to  the  law 
and  was  adequately  secured.  The  directors  of  the  National 
Reserve  Association  and  of  the  district  branches  were  to  be 
elected,  to  the  number  of  thirty-nine,  in  such  a  manner  as  to 
give  recognition  to  the  small  banks  and  to  business  and  com- 
merce apart  from  banking  interests.  The  governor  of  the 
bank  was  to  be  selected  by  the  President  of  the  United  States, 
and  was  to  be  one  of  seven  ex-offido  members  of  the  Board  of 
Directors,  the  others  being  two  deputy-governors  of  the  as- 
sociation, chosen  by  the  directors,  and  four  public  officials, — 
the  Secretary  of  the  Treasury,  the  Secretary  of  Agriculture, 
the  Secretary  of  Commerce,  and  the  Comptroller  of  the 
Currency.  The  terms  of  the  directors  chosen  by  the 
banks  were  to  be  for  three  years,  one-third  retiring  each 
year. 

1  Report  of  National  Monetary  Commission,  January  9,  1912,  Senate 
Document  243,  62d  Congress,  2d  Session. 


446  HISTOR  Y  OF  MODERN  BANK'S  OF  ISSUE. 

The  bank-notes  authorized  by  the  measure  were  to  be 
based  upon  the  general  assets  of  the  Reserve  Association, 
subject  to  certain  reserve  requirements,  and  were  to  be  a 
first  lien  upon  such  assets.  The  amount  issued  up  to 
$900,000,000,  including  notes  substituted  for  national  bank- 
notes already  outstanding,  was  to  be  free  from  special  tax; 
but  issues  above  $900,000,000  were  to  pay  a  tax  at  the  rate 
of  one  and  a  half  per  cent,  and  above  $1,200.000,000  at  the 
rate  of  five  per  cent. ;  but  amounts  fully  covered  by  gold  or 
lawful  money  were  to  be  free  of  tax. 

The  Reserve  Association  was  required  to  maintain  a  re- 
serve of  not  less  than  fifty  per  cent,  against  its  demand  liabili- 
ties, both  on  account  of  deposits  and  notes,  including  new 
issues  of  notes  as  well  as  those  issued  in  place  of  outstanding- 
national  bank-notes.  It  was  provided  that  when  the  reserve 
against  liabilities  should  fall  below  fifty  per  cent,  a  graduated 
tax  should  be  paid,  at  the  rate  of  one  and  a  half  per  cent, 
per  annum  for  each  two  and  a  half  per  cent,  of  the  deficiency, 
and  that  when  the  reserve  fell  below  thirty-three  and  a  third 
per  cent,  no  further  issues  of  notes  should  be  made.  » 

The  bonds  held  by  national  banks  to  secure  circulation 
were  to  be  taken  off  their  hands  at  not  less  than  par  and 
accrued  interest  by  the  National  Reserve  Association,  which 
was  given  the  right  to  issue  notes  to  the  amount  of  bank- 
notes which  had  been  based  upon  the  bonds.  The  Secretary 
of  the  Treasury  was  authorized  to  exchange  the  two  per 
cent,  bonds  thus  purchased  for  three  per  cent,  bonds,  running 
for  fifty  years,  which  were  to  be  held  by  the  Reserve  Asso- 
ciation, with  the  right  after  five  years,  with  the  approval 
of  the  Secretary  of  the  Treasury,  to  sell  not  more  than 
$50,000,000  per  year.  The  government  was  protected  from 
loss  which  might  have  resulted  from  the  increased  interest 
charges  on  the  bonds  by  the  levy  of  an  annual  franchise  tax 
equal  to  one  and  a  half  per  cent,  of  the  amount  of  old  bonds 
converted  into  three  per  cent,  bonds. 

Existing  national  banks  were  permitted  to  keep  balances 
with  the  National  Reserve  Association  and  to  count  them 
and  the  notes  of  the  Association  as  a  part  of  their  reserves. 


THE  NATIONAL  BANKING  SYSTEM.  447 

It  was  not  made  obligatory  upon  these  banks,  however,  to 
transfer  their  reserves  from  former  reserve  banks  to  the 
National  Reserve  Association.  They  were  given  the  privi- 
lege of  presenting  commercial  paper  for.  rediscount  to  the 
Reserve  Association,  when  such  paper  consisted  of  notes  and 
bills  of  exchange  issued  or  drawn  for  agricultural,  industrial, 
or  commercial  purposes.  Notes  or  bills  issued  or  drawn  for 
the  purpose  of  carrying  stocks,  bonds,  or  other  investment 
securities  were  excluded  from  the  classes  of  paper  which 
could  be  rediscounted  by  the  Reserve  Association.1  Paper 
of  this  character  having  not  more  than  twenty-eight  days  to 
run  could  be  discounted  by  the  Reserve  Association  for  in- 
dividual banks;  but  if  having  a  longer  term  to  run  could  be 
rediscounted  only  with  the  guarantee  of  the  local  association. 
The  Reserve  Association  was  authorized,  in  case  of  serious 
emergency,  to  discount  the  direct  obligations  of  individual 
banks  having  the  guaranty  of  the  local  association  and 
secured  by  a  pledge  of  collateral.  The  Reserve  Association 
was  given  authority  to  fix  rates  of  discount  from  time  to 
Jime,  such  rates  to  be  uniform  throughout  the  United  States; 
to  purchase  and  borrow  gold;  to  deal  in  foreign  bills  of 
exchange,  and  to  purchase  acceptances  from  member  banks. 
While  the  report  of  the  National  Monetary  Commission 
was  not  destined  to  be  formally  taken  up  by  Congress,  it 
was  the  forerunner  of  an  even  more  radical  departure  from 
old  banking  methods,  to  be  adopted  within  less  than  two 
years;  and  the  principle  that  the  old  system  of  bond -secured 
notes  must  give  way  to  a  more  scientific  currency  was  given 
official  recognition,  even  before  the  report  of  the  commission 
was  made  to  Congress,  in  the  act  of  March  2,  1911,  which 
provided  that  future  issues  of  Panama  Canal  bonds  should 
not  be  available  as  security  for  the  issue  of  bank-notes. 


*  Similar  definitions  of  the  classes  of  business  permitted  were  em- 
bodied in  the  Federal  Reserve  Act  of  December  23,  1913,  Sec.  13. 


CHAPTER  XVI. 

THE   CANADIAN   BANKING  SYSTEM. 

Its  Origin  and  Growth — Foundation  of  the  Bank  of  Montreal — The 
Union  of  the  Canadian  Provinces  and  the  Dominion — Banking 
Reforms  in  1870,  1880,  and  1890 — The  Effect  upon  the  Security 
of  Note  Issues  and  the  Small  Losses  by  Failure — Recent  Sus- 
pensions— The  Reforms  of  1900  and  1908. 

THE  Canadian  banking  laws  now  in  force  represent  an 
almost  steady  growth  from  comparatively  crude  con- 
ditions to  a  perfected  scientific  system.  Founded 
originally  upon  Scotch  models,  the  Canadian  banks  enjoyed 
at  first  the  freedom  from  even  the  police  supervision  of  the 
government  which  naturally  arose  from  the  fact  that  they 
framed  their  own  charters.  Canadian  banking  was  not 
exempt  from  the  risks  and  difficulties  of  the  other  institu- 
tions of  a  new  and  growing  country,  and  defects  in  the  secur- 
ity of  the  note  issues  and  the  protection  of  deposits  were 
gradually  remedied  as  they  were  disclosed  by  experience. 
The  development  of  the  Canadian  system,  however,  has 
been  natural  and  symmetrical  and  most  of  the  changes  in 
the  law  have  had  the  approval  of  the  leading  bankers.  At- 
tempts have  been  several  times  made  to  substitute  a  govern- 
ment currency  or  a  specially  secured  circulation  for  the 
elastic  medium  provided  by  the  banks,  but  these  attempts 
have  not  been  sufficiently  successful  to  destroy  the  essential 
advantages  of  the  Canadian  banking  system.  They  have 
resulted  in  putting  a  considerable  volume  of  government 
paper  alongside  the  bank-note  currency  and  in  requiring  a 
certain  percentage  of  this  paper  to  be  held  by  the  banks  in 

448 


THE   CANADIAN1  BANKING  SYSTEM.  449 

their  cash  reserves,  but  they  have  npt  supplanted  the  bank- 
note currency  and  are  not  likely  to  be  permitted  to,  unless 
the  necessities  of  the  government  in  time  of  war  should  be- 
come paramount  to  the  commercial  interests  of  the  country. 

The  history  of  Canada  is  that  of  several  separate  provinces 
before  the  union  in  1841.  The  movement  for  better  banking 
facilities  began  independently,  but  almost  simultaneously  in 
each  province  early  in  the  present  century.  The  scarcity  of 
specie  or  of  any  other  circulating  medium  in  Lower  Canada 
was  partially  supplied  by  the  "  Army  bills"  issued  by  the 
government  during  the  war  with  the  United  States  and  it 
was  not  until  1817  that  a  banking  company  was  formed.1 
Previous  attempts  to  found  a  bank  had  been  addressed  to 
the  local  legislature  of  Lower  Canada,  but  on  June  23,  1817, 
a  meeting  was  held  at  Montreal  at  which  an  association  was 
formed  with  a  capital  stock  of  .£250,000.  An  office  was 
opened  in  August  under  the  title  of  the  Bank  of  Montreal, 
without  waiting  for  legal  authority,  and  what  afterwards 
became  the  strongest  institution  of  the  Dominion  was  thus 
established.  The  bank  was  simply  a  private  partnership, 
with  unlimited  liability  of  the  shareholders,  and  continued  so 
until  the  passage  of  a  charter  by  the  legislature  on  March 
17,  1821,  which  was  approved  by  the  royal  government  and 
proclaimed  on  July  22,  1822. 

Charters  for  the  Quebec  Bank  and  the  Bank  of  Canada, 
situated  at  Montreal,  were  passed  at  the  same  session  of  the 
legislature  and  their  approval  by  royal  authority  was  pro- 
claimed on  November  30,  1822.  The  Quebec  Bank  had  been 
organized  in  a  similar  manner  to  the  Bank  of  Montreal  on 
July  9,  1818,  with  a  capital  of  ^75,000,  and  the  Bank  of 
Canada  had  been  organized  on  August  25,  1818,  with  a  capi- 
tal of  ,£200,000.  The  charter  of  the  Bank  of  Montreal, 
whose  provisions  were  followed  in  the  charters  of  the  other 
two  banks,  gave  the  institution  corporate  powers  until  June 

1  The  Army  bills  outstanding  at  the  close  of  the  war  in  March,  1815, 
were  .^1,249,996,  but  they  were  receivable  for  public  dues  and  con- 
vertible into  government  bills  of  exchange  on  London,  and  were  re- 
duced by  May,  1816,  to  ^200,000. 

29 


45°         HISTORY  OF  MODERN  BANXS  OF  JSSt7E. 

i,  1831,  and  provided  for  the  choice  of  thirteen  directors, 
who  must  be  British  subjects  and  holders  of  at  least  four 
shares  each.  The  principle  of  limited  liability  was  applied 
to  the  shareholders,  without  any  obligation  beyond  the 
amount  of  their  subscription  to  the  stock,  but  the  directors 
were  to  be  liable  to  the  stockholders  as  well  as  to  the  holders 
of  bank-notes  in  case  the  debts  of  the  corporation  should  ex- 
ceed treble  the  amount  of  the  capital  stock  actually  paid  in, 
exclusive  of  the  deposits.  The  bank  was  prohibited  from 
lending  on  land  or  mortgage,  but  might  take  such  property 
for  debt  contracted  in  the  course  of  its  legitimate  dealings. 

The  fact  that  the  acts  passed  by  the  provincial  legislature 
for  the  incorporation  of  these  banks  were  based  upon  the 
articles  of  agreement  drawn  by  the  incorporators  made  the 
restrictions  trifling  which  were  imposed  upon  the  banks. 
There  was  no  limit  upon  the  volume  of  note  issues  except 
the  general  liability  of  the  directors  for  the  aggregate  indebt- 
edness. There  was  no  prohibition  upon  loans  upon  the 
stock  of  the  bank  or  upon  loans  to  directors.  The  fact, 
however,  that  each  bank  was  established  by  a  special  law 
afforded  some  measure  of  protection  against  indiscriminate 
private  banking  and  there  was  a  disposition  from  the  outset 
to  adhere  closely  to  Scotch  methods.1  An  indication  of  this 
is  given  by  the  prompt  establishment  of  branches  by  the 
Bank  of  Montreal  at  Quebec  and  by  both  the  Bank  of  Mon- 
treal and  the  Bank  of  Canada  at  Kingston  in  the  upper 
province.  The  banks  received  the  notes  of  their  competitors 
and  exchanged  them  and  settled  the  balances  in  specie  as 
often  as  once  a  week,  according  to  the  Scotch  system.  The 
Bank  of  Montreal  employed  an  agent  in  New  York  for  the 
negotiation  of  sterling  exchange  and  all  the  Canadian  banks 
of  importance  eventually  had  an  agent  or  correspondent  in 
the  American  metropolis. 


1  Mr.  R.  M.  Breckenridge,  in  his  admirable  work,  The  Canadian 
Banking  System,  published  by  the  American  Economic  Association, 
from  which  many  of  these  facts  regarding  early  Canadian  banking 
are  taken,  states  that  among  140  odd  charter  members  of  the  Bank 
of  Montreal  there  were  at  least  90  Scotch  names. 


THE  CANADIAN  BANKING  SYSTEM.  4$  I 

The  importance  of  freedom  of  note  issues  in  developing 
banking  in  a  new  country  is  indicated  by  the  early  returns 
of  the  Canadian  banks,  in  spite  of  the  considerable  deposits 
which  they  were  able  to  obtain.  The  total  deposits  of  the 
three  banks  of  the  lower  province  in  1824  were  ,£135,426, 
while  the  circulation  was  £167,498 ;  the  deposits  in  1825 
were  ,£151,637  and  the  notes  in  circulation  ,£177, 454;  the 
deposits  in  1826  were  ,£176,475  and  the  notes  ,£193, 548. 
The  debts  due  to  the  banks,  which  may  be  assumed  to 
represent  chiefly  the  discounts,  were  £529,363  in  1824, 
,£585,265  in  1825,  and  .£594,515  in  1826.  The  debts  due  the 
Montreal  Bank  in  the  latter  year  were  ,£371,334;  Quebec 
Bank,  ^"111,523;  and  Bank  of  Canada,  £111,658.  The 
banks  secured  the  renewal  of  their  charters  in  1830  and  1831, 
until  June  i,  1837.  The  legislation  of  this  time  cut  off 
possible  note  issues  by  private  bankers,  by  prohibiting  notes 
payable  to  bearer  except  when  issued  by  banks  incorporated 
by  law  in  Lower  Canada.  The  total  amount  of  notes  in 
circulation  for  less  than  $5  was  limited  to  one-fifth  the  capi- 
tal stock  of  the  Bank  of  Montreal  and  notes  for  less  than  five 
shillings  were  prohibited.  Similar  limitations  were  imposed 
upon  the  Quebec  Bank  and  the  power  was  reserved  to  the 
legislature  to  prohibit  or  limit  entirely  the  circulation  of 
notes  under  $5. 

The  Bank  of  Canada  found  its  business  falling  off  in  1825 
and  after  gradually  reducing  its  capital  stock  went  into 
liquidation  in  1831,  upon  the  lapse  of  the  charter.  The 
bank  did  not  fail  or  suspend  payments,  but  adopted  a  policy 
of  paying  uncurrent  and  underweight  coin,  which  led  the 
Bank  of  Montreal  to  refuse  its  checks  and  notes  and  caused 
the  rapid  reduction  of  deposits  until  it  became  unprofitable 
to  continue  business.  A  charter  was  granted  to  the  City 
Bank  of  Montreal  in  1831,  upon  the  representation  of  lead- 
ing merchants  that  the  capital  of  the  existing  bank  was 
' '  altogether  inadequate  to  the  circulation  of  the  valuable 
articles  of  import  and  export  which  its  geographic  position 
naturally  brings  to  it,"  and  that  the  most  effectual  preven- 
tive of  the  evil  of  monopoly  ' '  is  the  admission  of  reasonable 


452         HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

competition,  with  its  counteracting  influence."  Another 
Montreal  bank  began  business  in  1835  under  the  title  of  the 
Banque  du  Peuple  (Bank  of  the  People).  The  principal  part- 
ners were  Messrs.  Viger,  De  Witt,  and  Co.,  who  were  fully 
liable  for  the  debts  of  the  bank,  while  shares  were  issued  to 
persons  having  no  share  in  the  management  and  liable  only 
for  the  amount  of  their  stock,  according  to  the  French 
system  of  partnership  en  commandite. 

The  movement  for  a  bank  in  Upper  Canada,  now  consti- 
tuting the  Province  of  Ontario,  assumed  definite  shape  a 
trifle  earlier  than  in  Lower  Canada,  but  the  first  charter 
passed  by  the  provincial  legislature  did  not  receive  the  royal 
assent  within  the  period  provided  by  the  charter  to  give  it 
validity,  so  that  it  became  necessary  to  pass  a  new  charter  in 
1819.  The  royal  government  again  delayed  action,  but  the 
Bank  of  Upper  Canada,  situated  at  Kingston,  was  finally 
authorized  by  proclamation  of  the  royal  assent  on  April  21, 
1821,  more  than  a  year  before  such  assent  was  granted  for 
the  banks  of  Lower  Canada.  The  capital  of  the  bank  was 
originally  fixed  at  ,£200,000,  but  this  was  reduced  in  1823  to 
;£  100,000.  The  general  provisions  of  the  charter  were  simi- 
lar to  those  of  the  banks  of  Lower  Canada,  but  notes  under 
five  shillings  were  forbidden  from  the  outset  and  the  charter 
was  to  remain  in  force  until  June  i,  1848.  The  government 
subscribed  for  2,000  shares  of  the  capital  at  a  par  value  of 
,£25,000.  A  practical  monopoly  of  note  issues  was  conferred 
upon  the  bank  in  1823  by  an  act  prohibiting  banks  from 
carrying  on  business  in  the  province,  which  did  not  redeem 
their  notes  in  specie  writhin  its  limits.  The  development  of 
Upper  Canada  was  somewhat  more  rapid  after  the  establish- 
ment of  the  bank  than  before,  from  a  combination  of  causes, 
and  the  capital  stock  actually  paid  in  increased  from  /"io,- 
640  in  1823  to  the  full  limit  of  ,£100,000  in  1830.  The  debts 
due  by  the  bank  increased  from  ^107,598  on  December  15, 
1826,  to  ,£260,557  on  January  i,  1831,  and  the  notes  in  circu- 
lation increased  during  the  same  interval  from  ,£87,339  to 
.£187,039.  The  bank  encountered  only  the  rivalry  of  an 
institution  purporting  to  be  the  Bank  of  Upper  Canada  under 


THE   CANADIAN  BANKING  SYSTEM.  453 

a  forfeited  character,  which  soon  collapsed,  until  the  incor- 
poration in  1832  of  the  Commercial  Bank  of  the  Midland 
district.  The  capital  of  the  new  bank  was  fixed  at  ,£100,000. 
The  capital  of  the  Bank  of  Upper  Canada  was  increased  by 
a  like  amount  at  the  same  session,  and  the  utmost  eagerness 
was  shown  to  purchase  the  stock.  The  Commercial  Bank 
within  three  years  sought  and  obtained  power  to  double  its 
capital  stock  and  an  act  was  passed  incorporating  the  Gore 
Bank  at  Hamilton  with  a  capital  of  ^"100,000. 

The  first  bank  charter  in  New  Brunswick  received  the 
royal  assent  as  early  as  March  25,  1820.  The  institution 
was  known  as  the  Bank  of  New  Brunswick  and  was  located 
at  St.  John,  with  a  capital  of  ,£50,000.  The  shareholders 
were  liable  only  for  the  principal  of  their  stock,  and  debts 
by  the  directors,  either  as  principals  or  indorsers,  were  lim- 
ited to  one-third  of  the  paid-up  capital.  The  banks  were 
forbidden  by  an  Act  of  1838  to  issue  notes  of  a  less  denomi- 
nation than  five  shillings.  The  first  bank  of  issue  actually 
established  in  Nova  Scotia  was  opened  in  1825  at  Halifax 
under  the  title  of  the  Halifax  Banking  Company.  The 
Bank  of  Nova  Scotia,  which  was  the  first  chartered  bank, 
was  incorporated  by  an  Act  approved  March  30,  1832,  with 
an  authorized  capital  of  ,£100,000.  The  bank  was  without 
a  chartered  competitor  for  five  years  and  during  its  first  ten 
years  divided  profits  among  the  shareholders  at  the  average 
rate  of  8.9  per  cent,  and  increased  its  capital  to  ,£140,000. 
The  issue  of  bank-notes  for  less  than  ^5  was  prohibited  in 
Nova  Scotia  in  1834. 

The  banking  system  of  the  Canadian  provinces  was  thus 
established  on  a  comparatively  safe  and  scientific  basis, 
similar  to  the  Scotch  system  in  the  part  played  by  the  large 
incorporated  banks  and  their  branches,  but  without  any 
serious  control  by  law.  The  history  of  the  next  thirty  years 
involves  a  mania  for  banking  speculation  similar  to  that 
witnessed  in  the  United  States,  on  the  part  of  the  Canadian 
people,  and  an  effort  to  apply  the  rigid  limits  of  the  English 
restriction  act  on  the  part  of  the  home  government  at  Lon- 
don. The  banking  mania  seized  Upper  Canada  and  resulted 


454          HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

in  the  creation  of  several  joint  stock  banks  between  1834 
and  1837.  The  creation  of  such  banks  without  a  special 
charter  was  brought  to  a  summary  end  by  an  Act  of  1837, 
prohibiting  the  issue  of  circulating  notes,  except  by  banks 
holding  legislative  charters,  and  making  such  issues  a  misde- 
meanor. The  banking  phrenzy  was  not  checked  by  this 
salutary  regulation.  The  House  of  Assembly  had  passed 
a  bill  in  1833  t°  enable  the  Receiver  General  to  issue  notes 
chargeable  on  the  public,  and  a  select  committee  in  1835  re- 
ported in  favor  of  a  provincial  bank,  on  the  basis  of  loans 
guaranteed  by  the  province.  These  measures  alarmed  the 
home  government  and  resulted  in  a  despatch  to  the  Lieuten- 
ant Governor  August  31,  1836,  directing  him  not  to  permit 
any  act  touching  the  circulation  of  promissory  notes  or  the 
law  of  legal  tender  to  come  into  operation  in  Upper  Canada 
without  having  first  received  the  royal  sanction.  This 
precaution  was  taken  none  too  early,  for  bills  were  passed 
during  the  session  of  1836-37  increasing  the  banking  capital 
of  the  province  from  ,£500,000  to  ^4,500,000  and  conferring 
a  power  of  note  issue  to  the  limit  of  <£'i3,5oo,ooo.1  The 
Imperial  government  did  not  formally  disallow  these  acts, 
but  returned  them  to  the  Colonial  legislature  for  more  sober 
consideration.  This  course  was  effective  and  none  of  the 
measures  were  re-enacted. 

The  union  of  Upper  and  Lower  Canada  was  accomplished 
on  February  5,  1841,  under  the  title  of  the  Province  of 
Canada,  and  banking  legislation  was  henceforth  enacted  in 
uniform  terms  for  the  entire  province.  The  government  of 
Upper  Canada  prepared  for  the  union  by  the  sale  of  the 
government  stock  in  the  Bank  of  Upper  Canada  and  the 
separation  of  the  government  from  official  connection  with 
the  bank.  A  scheme  was  brought  forward  soon  after  the 
union  by  the  Governor  General,  Lord  Sydenham,  for  a  pro- 
vincial bank  of  issue  under  the  direct  authority  of  the  gov- 
ernment. Lord  Sydenham  was  a  personal  friend  of  Lord 
Overstone,  the  great  champion  of  "  the  currency  principle  " 
in  England,  and  endeavored  to  engraft  upon  Canadian 

1  Breckenridge,  77. 


THE   CANADIAN  BANKfNG  SYSTEM.  455 

finances  the  separation  of  the  functions  of  note  issue  and 
banking  which  were  imposed  upon  the  Bank  of  England  by 
the  Act  of  1844.  Lord  Sydenham  suggested  a  series  of 
resolutions  for  a  bank,  with  no  other  powers  than  that  of 
issue,  with  an  authorized  circulation  of  ;£  1,000,000  and  an 
excess  issued  only  against  coin  or  bullion.  The  authorized 
circulation  was  to  be  protected  by  government  securities,  of 
which  the  interest  was  to  go  to  pay  the  expense  of  managing 
the  bank  and  any  balance  to  the  public  Treasury.  There 
was  a  strong  outburst  of  public  feeling  against  destroying 
the  profits  and  efficiency  of  the  existing  banks  and  the  con- 
servatives, French  Canadians,  and  a  few  supporters  of  the 
party  in  power,  united  in  committee  of  the  whole  on  August 
31,  1841,  in  a  resolution  "  that  it  is  inexpedient  to  take  int.o 
further  consideration  during  the  present  session  the  estab- 
lishment of  a  provincial  bank  of  issue,  or  the  issue  in  any 
way  of  a  paper  currency  on  the  faith  of  the  province. ' ' l 

The  committee  which  considered  Lord  Sydenharn's  pro- 
posals admitted  the  propriety  of  some  uniform  regulation  of 
the  banks,  and  it  had  been  repeatedly  urged  in  circulars 
from  the  home  government.  These  recommendations  con- 
templated the  usual  safeguards  against  unsound  banking, — 
limiting  the  business  of  the  banks  to  a  proper  banking 
business,  conducted  after  the  subscription  of  the  capital,  and 
involving  forfeiture  if  specie  payments  were  suspended  for 
sixty  days.  These  restrictions  were  applied  to  the  three 
banks  of  Lower  Canada  when  they  sought  a  renewal  of  their 
charters  in  1841.  Notes  under  five  shillings  were  prohibited, 
and  notes  under  one  pound  were  not  to  exceed  one-fifth  of 
the  paid-up  capital.  The  various  charters  were  to  expire  at 
the  end  of  the  first  session  of  Parliament  after  June  or  De- 
cember i,  1862.  Double  liability  was  imposed  upon  share- 
holders, and  nearly  all  the  provisions  for  the  public  security 
which  had  prevailed  in  either  Lower  or  Upper  Canada  were 
now  applied  to  the  banks  of  the  entire  province.  The  pet 
theory  of  the  home  government,  that  coin  should  take  the 
place  of  small  notes,  in  order  to  constitute  a  healthy  monetary 
^  *  Breckenridge,  112. 


456          HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

system,  led  to  considerable  correspondence  in  1846,  pending 
the  approval  of  a  charter  passed  in  that  year,  but  the  gov- 
ernment finally  consented  to  the  retention  of  the  $i  notes. 

The  mania  for  ' '  free  banking ' '  on  securities  seized  upon 
the  Canadian  people  towards  the  middle  of  the  century  and 
resulted  in  the  law  of  1850,  based  upon  New  York  models. 
William  Hamilton  Merritt  was  the  author  of  the  new  law, 
and  he  first  brushed  away  the  obstacles  by  the  repeal  of  the 
laws  prohibiting  the  circulation  of  the  notes  of  private  bank- 
ers. Such  note  issues  were  permitted,  provided  that  the 
banks  formed  for  the  purpose  deposited  Provincial  securities 
with  the  Receiver-General  for  not  less  than  $100,000  as  a 
pledge  for  their  notes.  One  of  the  objects  of  this  legisla- 
tion,— to  broaden  the  market  for  Provincial  securities, — was 
indicated  by  the  provision  that  these  notes  were  to  be  exempt 
from  the  tax  of  one  per  cent,  per  year  imposed  on  the  circu- 
lation of  the  chartered  banks,  and  that  the  latter  might 
surrender  their  circulation  against  their  assets,  and  issue 
notes  upon  deposits  of  securities.  The  notes,  in  case  of 
suspension,  were  to  be  paid  from  the  proceeds  of  the  securi- 
ties, and  any  balance  was  to  be  applied,  with  the  other  assets, 
to  the  settlement  of  the  remaining  debts  of  the  bank.  The 
notes  were  to  constitute  a  preferred  claim  against  other  as- 
sets in  case  the  proceeds  of  the  securities  proved  insufficient. 

The  effort  to  drive  the  chartered  banks  into  the  secured 
note  system  was  carried  further,  in  1851,  by  a  bill  granting 
certain  exemptions  from  taxation  to  banks  which  were  will- 
ing to  restrict  their  circulation  to  the  maximum  shown  in 
their  last  statement  and  to  reduce  it  in  three  years  to  three- 
fourths  of  the  average  for  1849  and  1850.  Such  banks  were 
permitted  to  issue  additional  notes  to  the  amount  held  in 
gold  or  silver  coin  or  bullion,  or  in  debentures  issued  by  the 
Receiver-General  and  reckoned  at  par.  They  were  not  re- 
quired to  deposit  the  debentures,  but  were  required  in  case 
of  failure  to  apply  them  exclusively  to  the  redemption  of 
their  notes.  The  fact  that  the  banks  were  required  to  hold 
the  debentures  permanently,  whether  in  the  custody  of  the 
government  or  in  their  own  vaults,  resulted  in  withdrawing 


THE  CANADIAN  BANKING  SYSTEM.  457 

active  capital  from  commercial  banking  and  offering  insuffi- 
cient inducement  to  investors  of  banking  capital.  Five 
banks  were  created  under  the  law,  of  which  two  soon  disap- 
peared and  three  were  continued  under  special  charters. 
The  Bank  of  British  North  America,  which  operated  in  all 
the  provinces  under  a  royal  charter,  apparently  obtained  the 
greatest  advantages  from  the  secured  note  system  by  employ- 
ing it  prudently  in  connection  with  its  other  business.  The 
failure  of  the  "Free  Banking  Act "  was  acknowledged  as 
early  as  1859,  but  it  was  not  repealed  until  the  passage  of 
the  Provincial  Note  Act  of  1866. 

The  temptation  to  use  the  power  of  note  issue  for  the 
benefit  of  the  State  assailed  the  provincial  authorities  again 
in  1866,  when  the  government  found  themselves  compelled 
to  raise  about  $5,000,000  to  discharge  the  floating  debt. 
Mr.  A.  T.  Gait,  Minister  of  Finance,  succeeded  in  carrying 
a  bill,  which  received  the  royal  assent  August  15,  1866, 
assuming  the  power  of  the  Province  to  issue  not  more  than 
$8,000,000  of  notes,  payable  on  demand  in  specie  at  Montreal 
or  Toronto  and  legal  tender  except  at  those  offices.  He  did 
not  dare  propose  the  immediate  abolition  of  the  bank-note 
currency,  but  proposed  an  indemnity  payment  by  the  gov- 
ernment of  five  per  cent,  per  year,  on  the  amount  of  notes 
outstanding  on  April  30,  1866,  until  the  expiration  of  the 
charter  of  any  bank  which  might  accept  the  conditions  of 
the  act  and  withdraw  its  own  circulation  before  January  i, 
1868.  Banks  willing  to  accept  this  offer  were  relieved  from 
the  requirement  to  invest  ten  per  cent,  of  their  capital  in 
debentures  and  allowed  to  exchange  them  at  par  for  Provin- 
cial notes.  The  Ba/ik  of  Montreal  was  the  only  institution 
which  accepted  the  new  system  and  gradually  substituted 
Provincial  notes  for  its  own  issue.  This  action  separated 
the  interests  of  the  Bank  of  Montreal  from  those  of  the 
other  banks  and  led  the  former  to  force  the  legal  tender 
notes  into  circulation  as  rapidly  as  possible  in  the  settlement 
of  its  balances.  The  Bank  of  Montreal  was  able  to  force 
the  other  banks  into  holding  legal  tenders  by  threatening 
to  exact  settlements  in  legal  money,  which  the  other  banks 


4$8          HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

were  thus  compelled  to  set  aside  for  the  purpose.  The  result 
was  a  reduction  of  the  banking  resources  of  the  other  banks 
and  the  complication  of  the  paper  currency  by  the  rival  cir- 
culation of  the  Provincial  notes  in  competition  with  bank- 
notes. 

New  Brunswick  and  Nova  Scotia  were  brought  within  the 
circle  of  Canadian  banking  legislation  by  the  Act  of  1867, 
creating  the  Dominion  of  Canada,  which  conferred  exclusive 
authority  in  matters  connected  with  currency,  coinage,  and 
banking  upon  the  Parliament  of  the  Dominion.  The  charters 
of  existing  banks  were  extended  temporarily  to  the  end  of  the 
first  session  of  Parliament  after  January  i,  1870,  and  several 
provisions  affecting  the  Canadian  banks  were  extended  to 
those  of  New  Brunswick  and  Nova  Scotia.  The  Provincial 
note  issue  was  consolidated  into  an  issue  of  Dominion  notes 
and  redemption  agencies  were  provided  for  in  the  capitals 
of  the  four  provinces.  The  banks  in  existence  when  the 
Confederation  became  a  fact  on  July  i,  1867,  were  eighteen 
in  Ontario  and  Quebec,  five  in  Nova  Scotia,  four  in  New 
Brunswick,  and  one  operating  in  all  the  provinces  under 
royal  charter. 

The  attempts  to  create  a  secured  circulation  or  a  gov- 
ernment currency  were  renewed  after  the  creation  of  the 
Dominion,  and  the  supporters  of  the  former  had  the  benefit 
of  the  example  of  the  United  States  and  the  active  efforts  of 
Mr.  E.  H.  King,  the  manager  of  the  Bank  of  Montreal.  A 
scheme  of  this  sort  was  taken  up  by  Mr.  Rose,  the  new 
Minister  of  Finance,  in  1869,  and,  according  to  his  bill,  was 
to  go  into  effect  on  July  i,  1871.  The  banks  after  that  date 
were  to  be  required  to  reduce  their  unsecured  circulation 
twenty  per  cent,  a  year  until  the  whole  should  be  retired,  and 
were  permitted  to  issue  notes  up  to  the  amount  of  their  capi- 
tal stock  actually  paid  in,  bearing  on  their  face  the  statement 
that  they  were  secured  by  the  deposit  of  Dominion  securi- 
ties. These  notes  were  to  be  legal  tender  throughout  the 
Dominion,  except  at  the  office  of  the  issuing  bank,  so  long 
as  they  were  redeemed  in  specie,  and  were  to  be  protected  by 
a  cash  reserve  amounting  to  twenty  per  cent,  of  the  notes 


THE   CANADIAN  BANKING  SYSTEM.  459 

and  one-seventh  of  the  deposits  subject  to  call.  The  notes 
were  to  constitute  the  first  charge  upon  the  assets  in  case  of 
insolvency.  The  opposition  was  so  strong,  and  there  were 
so  many  measures  whose  success  was  more  important  to  the 
ministry,  that  Mr.  Rose  announced  on  June  I5th  the  tem- 
porary withdrawal  of  the  plan  for  the  session.  Sir  Francis 
Hincks  became  Minister  of  Finance  before  the  next  session 
and  he  abandoned  the  policy  of  a  specially  secured  circula- 
tion and  contented  himself  with  throwing  some  additional 
safeguards  around  the  existing  bank-note  system. 

The  charters  of  the  banks  were  extended  by  the  Act  of 
May  12,  1870,  for  a  period  often  years,  and  the  most  impor- 
tant changes  of  the  period  were  then  made.  The  desire  for 
a  codification  of  the  banking  law  led,  however,  to  a  more  com- 
prehensive act  in  1 87 1,1  which  embodied  the  reforms  of  1870 
with  some  minor  changes  and  many  amplifications  of  detail. 
The  banks  in  1870  surrendered  the  right  to  issue  notes  below 
the  denomination  of  $4  and  secured  in  compensation  the 
abolition  of  the  one  per  cent,  tax  and  the  repeal  of  the  re- 
quirement to  keep  one-tenth  of  their  capital  in  Dominion 
securities.  The  government  assumed  the  issue  of  small 
notes  and  the  banks  were  required  to  hold  not  less  than  one- 
third  of  their  cash  reserves  in  Dominion  notes.  The  severe 
period  of  depression  through  which  the  Dominion  passed 
between  1874  and  1879,  and  the  several  bank  failures  which 
occurred,  led  to  further  important  changes  in  the  banking 
law  when  the  charters  were  about  to  expire  in  1880.  The 
bankers  themselves  came  forward  with  the  proposals  for 
reform  and  were  now  willing  to  accept  several  propositions 
which  they  had  before  rejected.  The  minimum  denomina- 
tion of  notes  was  changed  to  $5  and  the  banks  were  required 
to  retire  the  notes  for  $4  as  soon  as  practicable.  The  pro- 
portion of  cash  reserve  to  be  held  in  Dominion  notes  was 
increased  to  forty  per  cent.  The  use  of  the  title  of  "  Bank  " 
by  a  private  firm  not  incorporated  under  the  laws  of  the 
Dominion  was  made  a  misdemeanor,  unless  the  words  '  *  Not 

1  Act  of  April  14,  1871,  "relating  to  banks  and  banking,"  34  Vic- 
toria, c.  5. 


460         HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

Incorporated  ' '  were  added  to  the  title.  This  provision  was 
made  to  prevent  the  public  from  mistaking  private  bankers 
for  those  holding  charters  and  was  extended  in  1890  so  that 
any  such  expression  as  "  Bank"  or  "  Banking  House"  was 
made  illegal,  whether  the  words  ' '  Not  Incorporated ' '  were 
added  or  not. 

The  history  of  the  Canadian  banking  system  between  1880 
and  the  renewal  of  the  bank  charters  in  1890  was  a  compara- 
tively uneventful  one,  but  experience  of  the  banking  law  had 
suggested  a  number  of  reforms  which  were  carefully  dis- 
cussed before  the  renewal  was  voted.  It  was  found  that  the 
notes  of  the  banks  did  not  remain  steadily  at  par  in  those 
parts  of  the  country  far  removed  from  the  redemption 
agencies.  It  was  also  found  that,  notwithstanding  the 
ample  security  for  the  final  payment  of  the  notes  of  failed 
banks,  they  sometimes  dropped  to  a  discount  when  the 
holders  desired  to  realize  upon  them  at  once.1  The  impor- 
tance of  concerted  action  to  secure  the  reforms  desired  by 
the  public,  without  infringing  upon  the  freedom  of  banking, 
was  keenly  felt  by  the  leading  banks  and  the}''  held  a  meeting 
in  Montreal  on  January  n,  1890,  at  which  they  resolved  to 
request  an  interview  with  Mr.  Foster,  the  Minister  of  Fi- 
nance. The  request  was  granted  and  interviews  took  place 
on  January  25th  and  February  nth  and  i2th.  Several  dif- 
ferences of  opinion  developed  regarding  details,  some  of 
which  were  carried  before  the  Privy  Council,  but  a  thorough 
revision  of  the  banking  law  was  enacted  and  received  the 
royal  assent  on  May  16,  iSgo.2  The  important  features  of 
the  Canadian  banking  system,  as  it  developed  from  the  legis- 

1  "  Although  the  liquidators  were  ready  to  redeem  within  a  month, 
the  discount  on  the  notes  of  the  Exchange  Bank  after  its  failure  rose 
as  high  as  five  or  ten  per  cent.     Redemption  of  the  notes  of  the 
Maritime  Bank,  though  finally  in  full,  was  delayed  for  nearly  three 
years  after  the  failure,  and  in  the  meanwhile  its  issues  sold  for  as  low 
as  forty  cents  on  the  dollar.     In  notes  of  the  Central  Bank  of  Canada, 
Americans  near  Sault  Ste.  Marie  found  a  profitable  speculation  by 
buying  them  up  after  the  failure,  at  ten  per  cent,  discount." — Breck- 
enridge,  315. 

2  53  Victoria,  c.  31,  "  An  Act  respecting  banks  and  banking." 


THE   CANADIAN  BANKING  SYSTEM.  461 

lation  of  1870  and  1880  into  that  of  1890,  may  be  discussed 
under  the  following  headings  : 

1.  Security  of  note  issues. 

2.  Elasticity  of  circulation. 

3.  Uniformity  of  circulation,  without  discount  upon  the 
notes. 

4.  Inspection  of  accounts  and  security  of  general  creditors. 

5.  Cash  reserves  and  the  use  of  coin. 

6.  Branch  banks  and  the  requirement  of  large  capital. 

i.  The  essential  conditions  which  secure  the  note  issues 
of  the  Canadian  banks  are  the  duplicate  liability  of  share- 
holders, the  first  lien  of  note-holders  upon  the  assets  of  a 
failed  bank,  the  Bank  Circulation  Redemption  Fund,  and 
the  five  per  cent,  interest  which  accrues  upon  the  notes  of 
failed  banks  from  the  date  of  refusal  to  redeem  to  the  date 
when  readiness  to  redeem  is  again  announced.  The  dupli- 
cate liability  of  shareholders  dates  back  to  1834  in  Ontario 
and  1841  in  Quebec.  The  making  of  the  notes  a  first  lien 
on  the  assets  was  suggested  by  the  bankers  in  1869,  but  was 
abandoned  because  of  the  opposition  of  Mr.  Hincks.  He 
feared  that  the  impairment  of  the  equal  claims  of  other 
creditors  which  this  provision  involved  would  lead  to  a  run 
by  depositors  and  to  the  injury  of  the  banks.  The  failures 
between  1874  and  1879  compelled  many  note-holders  to 
realize  on  their  notes  at  a  great  discount,  in  order  to  obtain 
immediate  use  of  their  money,1  and  dissatisfaction  was  so 
great  that  the  bankers  again  proposed  in  1880  that  the  notes 
be  made  a  first  lien.  The  total  assets  of  each  bank  were 
from  six  to  ten  times  its  note  obligations  and,  if  these  assets 
were  lost,  the  duplicate  liability  of  the  shareholders  would 
still  cover  the  outstanding  notes.  These  resources  consti- 
tuted a  security  for  the  redemption  of  the  notes  which  it 
was  believed  would  prove  complete,  and  which  the  bankers 
were  willing  to  concede  to  the  public  for  the  privilege  of 
retaining  unimpaired  their  power  of  note  issue. 

The  Act  of  1890  confirmed  the  provisions  of  1880  for 
making  the  notes  a  first  lien  on  the  assets,  and  added  two 
1  Breckenridge,  289.  Canadian  bank-notes  are  not  legal  tender. 


462          HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

new  provisions  designed  to  keep  the  notes  of  a  failed  bank 
absolutely  at  par  during  the  period  of  liquidation.  The 
most  important  of  these  was  the  creation  of  a  safety  fund,  to 
be  called  "  The  Bank  Circulation  Redemption  Fund,"  which 
was  to  be  raised  by  contributions  from  the  banks,  before  July 
16,  1892,  to  an  amount  equal  to  five  per  cent,  of  the  average 
circulation  of  each  contributing  bank.  The  redemption  fund 
is  in  the  custody  of  the  Minister  of  Finance  and  bears  interest 
at  the  rate  of  three  per  cent,  per  annum.  It  is  specifically 
set  apart  for  the  payment  of  the  notes  of  failed  banks. 
Redemptions  are  required  to  be  made  without  regard  to  the 
amount  which  the  failed  bank  may  have  paid  into  the  re- 
demption fund,  but  when  the  redemptions,  with  interest, 
exceed  such  payments,  the  Minister  of  Finance  may  call 
upon  the  other  banks  to  make  good  to  the  fund  the  amount 
of  such  excess.  These  calls  upon  the  other  banks  are  limited 
to  one  per  cent,  annually  of  the  amount  of  their  circulation 
and  the  amounts  thus  paid  by  the  banks  are  reimbursed  to 
them  when  recovered  from  the  failed  bank.1 

The  redemption  fund  afforded  a  guarantee,  if  it  was 
needed,  that  the  notes  of  a  failed  bank  would  always  be 
paid  in  full.  A  further  provision  was  made  that  the  notes 
of  failed  banks  should  bear  interest  at  the  rate  of  six  per 
cent,  per  year  from  the  day  of  suspension  to  the  date  named 
for  their  payment.2  The  practical  operation  of  this  provision 
has  been  eminently  successful  and  has.  in  connection  with 
the  guarantee  afforded  by  the  safety  fund,  made  the  notes 
of  a  failed  bank  as  valuable  an  investment  up  to  the  time 
of  redemption  as  a  six  per  cent.  bond.  The  holders  of  such 
notes  have  had  no  difficulty  in  selling  them  at  par  to  the 
other  chartered  banks,  to  brokers  or  to  persons  having  a  little 


1  The  omission  of  a  limitation  of  this  sort  upon  the  liability  of  the 
banks  for  the  general-safety  fund  was  one  of  the  causes  of  hostility  to 
the  banking  plan  of  Secretary  Carlisle,  presented  to  the  United  States 
Congress  in  his  annual  report  for  1894.     It  was  feared  that  the  indefi- 
nite character  of  the  liability  would  excite  alarm  among  depositors. 

2  Reduced  to  five  per  cent,  in  1900. 


THE  CANADIAN  & Atf KING  SYSTEM.  463 

money  seeking  temporary  investment.  The  legal  money 
of  redemption  under  Canadian  law  is  "specie,",  and  the 
gold  standard  is  maintained  with  but  little  gold  in  circula- 
tion. The  banks,  in  making  ordinary  payments,  were  re- 
quired by  the  law  of  1880  to  pay  amounts  up  to  $50,  upon 
request  of  the  payee,  in  Dominion  notes.  This  limit  was 
raised  in  the  Act  of  1890  to  $100. 

2.  One  of  the  important  benefits  inherent  in  the  Cana- 
dian bank-note  circulation  is  its  elasticity.  This  is  not  due 
affirmatively  to  recent  legislation,  but  is  due  to  the  success- 
ful resistance  of  Canadian  bankers  to  government  proposi- 
tions for  a  specially  secured  currency.1  The  banks  pay  out 
the  notes  when  business  activity  demands  them  and  the 
notes  drift  back  for  deposit  and  the  settlement  of  discounts 
when  business  activity  slackens.  The  circulation  thus  varies 
in  the  course  of  the  year  by  from  fifteen  to  twenty  per  cent. 
The  month  of  October  is  usually  that  of  the  maximum  cir- 
culation and  the  month  of  January  has  been  in  recent  years 
that  of  the  minimum.  The  first  month  of  the  year  is  usually 
marked  by  a  lull  in  business,  which  brings  surplus  notes  to 
the  banks  for  deposit.  The  revival  of  activity  in  the  Spring 
calls  out  a  few  additional  notes,  but  the  circulation  does  not 
increase  materially  until  the  movement  of  the  crops  sets  in 
in  August.  Then  comes  the  steady  expansion  of  note  issues 
to  meet  demand,  which  persists  until  the  middle  of  November. 
The  following  table  shows  for  representative  years  the  ex- 
pansion of  note  issues  in  the  Autumn  and  the  return  to 
normal  conditions  in  the  following  year : 


1  Even  in  1890  the  theory  of  a  circulation  based  upon  evidences  of 
the  public  debt  had  considerable  footing  and  was  advocated  by  Sir 
Donald  Smith,  President  of  the  Bank  of  Montreal.  It  seemed  to  be 
thought  in  Canada  that  such  a  system  would  benefit  the  larger  banks 
at  the  expense  of  the  weaker  and  some  of  the  opposition  to  the  crea- 
tion of  a  safety  fund  was  apparently  based  upon  the  fact  that  it  would 
invest  the  notes  of  the  weakest  banks  with  the  same  credit  as  those 
of  the  strongest. — Breckenridge,  320.  This  argument  was  necessarily 
directed  against  convenience  and  uniformity. 


464 


HISTOR  Y  OF  MODERN  BANKS  OF  ISSUE. 


Autumnal    Variations  in   Circulation. 


YEAR. 

AUG.  31. 

OCT.  31. 

INCREASE  IN 
OCTOBER. 

1898 

$37,299,000 

142,543,000 

$  5,244,000 

I9<X) 

47,421,000 

53,198,000 

5,777,000 

1902 

55,035,000 

65,928,000 

10,893,000 

1904 

6O,227,OOO 

72,226,000 

11,999,000 

I9°5 

62,495,000 

76,888,000 

14,393,000 

1906 

70,I08,000 

83,718,000 

13,610,000 

1907 

76,563,000 

84,290,000 

7,727,000 

1908 

70,390,000 

83,037,000 

12,647,000 

The  banking  experience  of  Canada  in  recent  years  is  a 
sufficient  vindication  against  the  charge  that  a  banking  cur- 
rency leads  to  inflation.  The  volume  -of  notes  usually  in 
circulation  exceeds  by  only  a  small  ratio  sixty  per  cent,  of 
the  aggregate  capital  stock  of  the  banks,  although  they  are 
allowed  to  issue  to  the  full  amount  of  their  capital.  Some 
of  the  banks  have  occasionally  touched  the  maximum  limit 
and  the  branches  have  been  promptly  notified  by  telegraph 
when  the  limit  has  been  reached.  A  real  demand  for  money 
from  such  banks  is  met  by  loans  to  them  from  banks  which 
have  not  reached  the  limit.  The  contracts  for  these  loans 
call  for  money,  like  other  contracts,  but  it  is  understood  that 
they  shall  be  paid  in  the  notes  of  the  lending  banks,  so  that 
the  public  get  the  benefit  of  the  limit  upon  their  combined 
issues.1  If  the  Canadian  system  has  been  subject  to  legiti- 
mate criticism  in  recent  years,  it  has  been  in  the  failure  of 
banking  capital  to  keep  pace  with  the  growth  of  the  country; 
and  the  increase  in  demand  for  currency  has  been  met  in  a 
large  degree  by  the  law  of  1913,  permitting  issues  on  central 
gold  reserves. 

3.  The  necessity  of  providing  more  fully  for  maintain- 
ing the  notes  of  all  the  banks  at  par  in  all  parts  of  the  Do- 
minion, which  was  recognized  in  1890,  was  due  not  so 
much  to  any  question  of  the  solvency  of  the  banks  as  to  the 
mechanical  provisions  for  redemption.  The  convenience  of 
note-holders  had  already  been  partially  provided  for  by  mu- 


1  Root,   Canadian  Bank-Note  Currency \    "Sound  Currency,"  II., 
No.  2,  p.  7. 


THE   CANADIAN  BANKING  SYSTEM.  465 

tual  arrangements  between  the  banks  for  the  redemption 
of  each  other's  notes.  It  would  have  involved  a  manifest 
injustice,  in  view  of  the  wide  difference  in  character  and 
strength  of  the  Canadian  banks  to  compel  each  to  redeem 
the  notes  of  all  others  against  its  will,  but  the  banks  were 
ready  to  accept  a  mandatory  law  requiring  each  bank  to 
establish  agencies  for  the  redemption  of  its  own  notes  at  the 
commercial  centre  of  each  province.  It  was  accordingly 
provided  in  the  Act  of  1890  (Section  55)  : 

The  bank  shall  make  such  arrangements  as  are  necessary  to  ensure 
the  circulation  at  par  in  any  and  every  part  of  Canada,  of  all  notes 
issued  or  reissued  by  it  and  intended  for  circulation  ;  and  towards 
this  purpose  the  bank  shall  establish  agencies  for  the  redemption  and 
payment  of  its  notes  at  the  cities  of  Halifax,  St.  John,  Charlottetown, 
Montreal,  Toronto,  Winnipeg,  and  Victoria,  and  at  such  other  places 
as  are,  from  time  to  time,  designated  by  the  Treasury  Board. 

4.  The  bank-note  circulation  of  Canada,  under  the  oper- 
ation of  the  redemption  fund  and  the  complementary  re- 
quirements, has,  in  the  language  of  Mr.  Breckenridge, 
"  acquired  a  thoroughly  national  character;  since  1890  it 
has  circulated  from  one  end  of  the  country  to  the  other, 
never  causing  loss  to  the  holder,  yet  keeping  unimpaired  the 
qualities  for  which,  in  its  less  perfect  state,  Canadians  had 
again  and  again  refused  to  give  it  up."1  The  fulfilment  of 
these  conditions,  with  the  elasticity  and  sufficiency  which 
usually  accompany  a  banking  currency,  meet  all  the  require- 
ments of  a  perfect  currency  system.  The  protection  of 
the  note-holder  against  both  temporary  and  permanent  loss 
closes  the  case  in  favor  of  Canadian  banks  of  issue.  They 
may  be  well  or  ill  managed  as  banks  of  discount  and  deposit, 
but,  as  such  banks  must  exist  under  any  currency  system, 
their  bad  management  cannot  be  made  an  argument  against 
the  power  of  note  issue  unless  that  power  increases  their  power 
for  evil  as  banks  of  discount  and  deposit.  Questions,  there- 
fore, relating  to  the  management  of  the  Canadian  banks  in 
their  discounting  business,  and  the  number  of  failures  they 
may  have  suffered,  should  not  be  confused  with  the  question 


1  The  Canadian  Banking  System,  338. 
30 


466          HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

of  the  success  of  their  system  of  note  issues  in  providing  a 
sufficient,  elastic,  and  secure  currency. 

Having  made  this  distinction,  it  may  be  admitted  that  the 
Canadian  banking  system  is  capable  of  improvement  in  the 
direction  of  official  supervision.  While  discount  banking  is 
essentially  a  private  business,  it  is  usually  done  by  corpora- 
tions holding  special  privileges  by  authority  of  the  state, 
and  the  subdivision  of  modern  industries  justifies  the  citizen 
in  asking  that  the  state  exercise  the  power  of  visitation  and 
supervision  over  such  corporations,  when  they  deal  inti- 
mately with  the  public,  which  he  cannot  conveniently  ex- 
ercise for  himself.  The  weakest  spot  in  the  Scotch  and 
Canadian  banking  systems  has  been  the  absence  of  this  su- 
pervision, and,  defective  as  government  supervision  often  is, 
it  would  probably  have  prevented  some  of  the  great  losses 
which  have  come  to  shareholders  in  those  countries.  The 
proposal  of  government  supervision  in  Canada  has  been  sev- 
eral times  brought  before  Parliament,  but  has  always  been 
resisted  upon  the  grounds  that  public  auditors  or  inspectors 
could  not  ascertain  accurately  the  real  character  of  banking 
assets,  and  that  the  fact  of  government  inspection  would 
mislead  the  public  into  a  confidence  which  might  prove  to  be 
misplaced.  The  project  of  inspection  was  renewed  by  Mr. 
Foster  in  1890,  but  the  auditors  whom  he  proposed  were  to 
be  appointed  by  the  shareholders  at  their  annual  meeting. 
The  same  objections  which  had  been  made  on  previous  occa- 
sions were  renewed  and  the  project  of  a  formal  audit  was 
again  abandoned. 

The  larger  Canadian  banks  are  not,  however,  without  a 
system  of  supervision  of  their  own,  which  ought  to  be  more 
efficient  than  that  of  government  officers  when  there  is  no 
collusion  between  the  inspector  and  general  manager.  Such 
collusion  is  not  likely  to  be  a  frequent  occurrence,  because 
the  chief  inspector  is  required  by  his  duties  to  be  a  man  of 
independent  judgment,  of  banking  experience  and  reputa- 
tion, and  to  receive  a  large  salary.  It  is  his  duty  to  make 
tours  of  the  branches,  annually  or  oftener,  for  the  purpose 
of  examining  the  character  of  the  discounts  granted  and  the 


THE   CANADIAN  BANKING  SYSTEM.  467 

general  policy  pursued.  The  mere  verification  of  accounts 
is  performed  by  subordinates.  The  chief  inspector,  there- 
fore, is  the  equal  in  character  and  position  of  the  general 
manager,  and  is  exposed  to  few  of  the  temptations  of  an 
inferior.  He  confers  with  the  latter  and  reports  the  results 
of  his  inquiries  regarding  the  standing  of  firms  seeking  dis- 
counts. If  the  inspector  is  associated  too  closely  by  family 
or  other  ties  with  the  general  manager,  the  fact  is  likely  to 
become  a  subject  of  business  gossip  and  to  impair  confidence 
in  the  bank.  The  establishment  of  the  general  redemption 
fund  has  had  a  salutary  effect  in  attracting  the  attention  of 
the  banks  to  each  other's  condition,  because  of  the  common 
responsibility  which  the  fund  imposes. 

The  safeguards  of  the  Canadian  system  have  been  such 
that  the  entire  losses  to  creditors,  exclusive  of  shareholders, 
since  confederation  in  1867,  have  been  very  limited  in  amount. 
Only  rarely  even  has  it  been  necessary  to  assess  share- 
holders under  their  duplicate  liability.  "The  record  for 
the  years  preceding  1867,"  says  Mr.  Breckenridge,  "is 
hardly  less  admirable,  there  being  no  failures  in  Nova  Scotia 
or  Lower  Canada,  while  in  New  Brunswick  the  double  lia- 
bility of  shareholders  saved  the  banks'  creditors,  and  in  Up- 
per Canada  the  failure  of  the  Bank  of  Upper  Canada  was  the 
only  one  which  inflicted  considerable  loss."  l  The  Bank  of 
Upper  Canada  violated  the  rules  of  sound  banking  under  the 
stimulus  of  a  period  of  rapid  growth  in  Ontario,  and  made 
heavy  loans  to  lawyers,  politicians,  and  the  gentry.  Much 
money  was  lost  in  the  land  speculations  of  1857,  tne  capital 
was  reduced  in  1861,  the  public  deposits  were  reduced  in 
1863,  another  reduction  of  capital  in  1866  failed  to  save  the 
bank,  and  payment  was  stopped  September  18,  1866,  with 
liabilities  of  $3,402,000.  The  assets  were  nominally  worth 
$5,362,000,  but  gradually  shrunk  until  in  1882  they  were  only 
$420,387  against  still  outstanding  liabilities  of  $1,380,015. 
Of  this  liability  $1,122,649  was  still  due  the  government, 
which  was  open  to  the  suspicion,  by  its  tardy  efforts  to  re- 


1  The  Canadian  Banking  System,  355 


468  HIS  TOR  Y  OF  MODE  RN  BA  NKS  OF  ISS  UE. 

cover,  that  it  had  abused  its  power  to  obtain  advances  from 
the  bank  during  its  period  of  prosperity.1 

Six  failures  occurred  in  Canada  between  1871  and  1881, 
six  between  1883  and  1889,  and  eight  between  1893  and 
1908.  The  notes  in  every  case  since  1881  have  been  paid 
in  full,  but  in  some  cases  prior  to  1890  they  were  redeemed 
after  considerable  delay  and  after  falling  to  a  discount. 
The  capital  of  only  four  of  these  failed  banks  was  larger  than 
$500,000,  and  in  three  of  these  four  cases  the  assets  and 
deposit  liabilities  were  assumed  by  other  Canadian  banks. 
The  first  of  these  larger  failures  was  that  of  the  Federal 
Bank  of  Canada,  which  increased  its  capital  in  1883  to 
$3,000,000,  but  was  compelled  to  reduce  it  in  1885  to  $i,- 
250,000  on  account  of  losses  from  Michigan  lumber  transac- 
tions and  loans  in  Manitoba.  The  other  banks  having 
offices  in  Toronto  came  to  the  assistance  of  the  Federal 
Bank  in  January,  1888,  and  agreed  to  advance  enough 
money  to  pay  off  its  entire  liabilities  and  assume  the  assets, 
if  the  bank  would  wind  up  its  affairs. 

The  more  important  failures  after  1890  were  those  of 
the  Commercial  Bank  of  Manitoba,  the  Banque  du  Peuple 
of  Montreal,  the  Ontario  Bank,  and  the  Sovereign  Bank  of 
Canada.  The  Commercial  Bank  succeeded  to  the  business 
of  a  private  firm  at  Winnipeg  in  1884  and  assumed  the  heavy 
risks  which  are  often  run  by  banks  in  new  countries.  Its 
business  was  essentially  local  and  its  failure  was  not  a  sur- 
prise to  other  bankers  in  the  Dominion.  The  other  banks 
were  critical  as  early  as  1892  about  accepting  the  drafts  of 
the  Commercial  Bank  on  Montreal,  and  in  May,  1893,  a 
drain  of  deposits  began.  The  bank  paid  out  its  notes  for 
a  time  to  nervous  depositors  and  thus  increased  its  circula- 
tion between  May  3ist  and  July  3d  by  the  sum  of  $140,605, 
while  the  deposits  were  reduced  $189,813."  The  automatic 

1  Breckenridge,  175. 

2  The  purpose  of  depositors  in  accepting  their  deposits  in  notes 
was  to  convert  an  ordinary  claim  into  a  preferred  claim,  but  the  pro- 
cess of  conversion  was  necessarily  limited  by  the  limit  of  circulation 
allowed  the  bank,  as  well  as  by  the  certainty  that  the  bank  would 
quickly  be  unable  to  settle  its  balances  with  the  other  banks. 


THE  CANADIAN  BANKING  SYSTEM.  469 

operation  of  the  Canadian  system  of  redemption  came  into 
play  when  these  notes  fell  into  the  hands  of  other  banks, 
and  the  Commercial  Bank  was  compelled  to  suspend  with 
liabilities  of  $1,344,269.  The  Banque  du  Peuple  was  com- 
pelled to  reduce  its  capital  in  1885  from  $1,500,000  to 
$1,200,000,  and  suspended  on  July  16,  1895,  with  a  circula- 
tion of  about  $787,000  and  with  total  liabilities  of  about 
$7,500,000. 

The  Banque  du  Peuple  closed  its  doors  in  the  hope  that 
arrangements  might  be  concluded  with  its  creditors  which 
would  enable  it  to  resume  business  within  the  period  of 
ninety  days,  for  which  continued  suspension  would,  under 
the  law,  "constitute  the  bank  insolvent  and  operate  a  for- 
feiture of  its  charter  or  act  of  incorporation,  so  far  as  regards 
all  further  banking  operations."  1  The  notes  remained 
steadily  at  par  and  were  redeemed  before  October  5th,  ex- 
cept $150,000,  for  which  the  money  was  held  in  the  bank. 
One  of  the  plans  proposed  for  reorganization  was  the  issue 
of  deposit  receipts  to  depositors,  payable  in  from  six  months 
to  two  years.  The  period  of  suspension  passed,  however, 
without  resumption,  and  it  appeared  at  the  meeting  of  the 
shareholders  on  December  17,  1895,  that  overdrafts  had  been 
granted  to  five  individuals  and  firms  amounting  to  $1,229,000, 
and  to  four  of  the  directors  to  the  amount  of  $235,000.  The 
depositors  eventually  received  75!  per  cent,  of  their  claims.2 

The  failure  of  the  Ontario  Bank  with  a  capital  of  $1,500, - 
ooo,  on  October  13,  1906,  was  not  due  to  unsoundness  in 
the  business  of  the  bank,  but  to  speculation  by  the  gen- 
eral manager  in  the  New  York  stock  market.3  Arrange- 
ments were  made  by  which  the  Bank  of  Montreal  assumed 
its  assets  and  paid  its  liabilities  to  the  public,  several  other 
banks  agreeing  to  indemnify  the  Bank  of  Montreal  in  case 
of  loss.  The  shareholders  lost  their  entire  investment,  how- 


'Sec.  91. 


"Sec.  91. 

2  Breckenridge,  in  Quarterly  Journal  of  Economics,  August,  1900, 
XIV.,  543. 

3  H.  M.  P.  Eckardt,  in  New  York  Bankers*  Magazine,  February, 
1907,  LXXIV.,  229. 


4/0  H1STOR  Y  OF  MODERN  BANKS  OF  ISSUE. 

ever,  and  were  subjected  to  a  considerable  assessment.1  The 
other  large  failure  of  the  time  was  that  of  the  Sovereign 
Bank,  which  had  been  founded  with  high  hopes  and  a 
capital  of  $4,000,000,  in  April,  1902.  So  aggressive  was 
the  bank  and  such  large  profits  did  it  show,  down  to  the 
spring  of  1906,  that  the  Dresdner  Bank  of  Berlin  at  that 
time  acquired  a  three-eighths  interest  in  its  capital,  and  the 
event  was  hailed  as  opening  a  new  era  in  international 
finance.2 

But  the  Sovereign  Bank  ventured  upon  unsafe  ground,  it 
became  necessary  to  write  off  the  whole  of  the  reserve  fund 
of  $1,250,000,  and  $1,000,000  of  the  capital  in  June,  1907, 
and  a  radical  change  was  made  by  the  foreign  bankers  in 
management  and  methods.8  Even  reorganization  failed 
to  save  the  institution  and  its  doors  were  closed  on  Janu- 
ary 18,  1908,  with  liabilities  to  the  public  of  $16,174,408. 
As  in  the  case  of  the  Federal  Bank  and  the  Ontario  Bank, 
other  Canadian  institutions  found  the  assets  of  the  failed 
bank  good  enough  to  warrant  their  assumption  of  its  lia- 
bilities, and  they  were  quietly  taken  over  without  a  day's 
embarrassment  to  depositors  or  other  creditors.  The  option 
was  given  to  depositors  of  withdrawing  their  funds  in  cash 
or  leaving  them  with  the  new  depository.4 

Of  the  four  smaller  banks  which  failed  between  1893 
and  1908,  the  first  was  the  Banque  Ville  Marie  in  1899, 
with  capital  and  reserves  of  $489,620  and  liabilities  to  the 
public  of  $1,766,841.  The  failure  was  essentially  fraudu- 
lent and  depositors  received  only  seventeen  per  cent,  of 
their  claims.  The  second  of  these  failures  was  that  of  the 
Bank  of  Yarmouth  in  1905,  with  capital  and  reserves  of 
$335,000  and  liabilities  to  the  public  of  $362,207.  The 
Banque  de  St.  Jean  at  St.  John's,  Quebec,  was  closed  on 


1  Letter  of  A.  St.  L.  Trigge,  Secretary  of  the  Canadian  Bank  of 
Commerce,  to  the  author,  September  17,  1908.      The  assessment  was 
then  estimated  at  about  fifty  per  cent. 

2  New  York  Bankers'  Magazine,  February,  1907,  I/XXIV.,  229. 

3  Ibid.,  August,  1907,  LXXV.,  248. 

*  Ibid.,  February,  1908,  LXXVL,  213. 


THE   CANADIAN  BANKING  SYSTEM.  471 

April  29,  1908,  with  a  capital  and  surplus  of  $326,386,  and 
nominal  assets  of  $970,847.  The  Banque  de  St.  Hyadnthe, 
in  the  same  neighborhood,  was  finally  closed  June  23,  1908, 
with  capital  and  surplus  of  $406,235  and  nominal  assets 
of  $1,576,443.  The  first  of  these  two  failures  showed  large 
elements  of  wrong-doing,  but  the  second  was  less  discredi- 
table and  depositors  recovered  a  considerable  proportion  of 
their  claims.  The  Bank  of  Montreal  was  prompt  to  open 
a  branch  in  St.  Hyacinthe,  which  offered  accommodation 
to  the  sound  customers  of  the  failed  institution.1 

5.  The  requirement  of  a  fixed  minimum  reserve  of  specie 
against  liabilities  was  suggested  by  Mr.  Hincks  in  1869,  but 
he  was  convinced  by  the  unanimous  opposition  of  the  bankers 
that  the  requirement  would  prove  more  of  an  injury  than  a 
benefit  to  the  business  community  in  times  of  stringency. 
It  was  pointed  out  that  a  reserve  which  cannot  be  used  is  of 
no  avail  in  emergencies  ;  that  if  the  proportion  were  low,  it 
would  be  treated  by  weak  banks  as  always  sufficient ;  and 
that  a  part  of  a  bank's  best  and  most  available  funds  often 
consisted  of  balances  in  New  York  and  L,ondon,  rather  than 
specie  in  its  own  vaults.  These  arguments  were  conclusive 
with  Mr.  Hincks,  but  they  failed  to  convince  Mr.  Foster 
when  the  plan  of  a  minimum  reserve  was  suggested  to  him 
in  1890.  The  experiment  of  a  minimum  reserve  had  then 
been  longer  in  operation  in  the  United  States  and  was 
believed  to  have  produced  beneficial  results.  It  was  pointed 
out,  however,  that  the  small  local  banks  of  the  United  States 
occupied  a  very  different  position  from  the  great  chartered 
banks  of  Canada  and  that  regulations  which  might  be 
necessary  in  the  one  case  might  not  be  in  the  other.  Mr. 
Foster's  proposition  was  to  require  each  bank  to  hold  specie 
and  Dominion  notes  to  the  amount  of  ten  per  cent,  of  its 
liabilities.  The  bankers  carried  the  contest  before  the  Privy 
Council  and  at  a  hearing  given  them  on  February  22,  1890, 
carried  the  majority  with  them  and  secured  the  exclusion  of 
any  provision  for  the  reserve  from  the  government  bill.2 

1  New  York  Bankers'  Magazine,  August,  1908,  LXXVII.,  241. 
9  Breckenridge,  327. 


47 <*         HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

One  of  the  strongest  arguments  in  favor  of  liquid  reserves 
and  banking  upon  general  assets,  without  government  inter- 
ference, is  found  in  the  comparative  calm  which  has  reigned 
among  Scottish  and  Canadian  bankers  when  those  of  other 
countries  have  been  shaken  by  panic.  A  serious  test  of 
this  kind  came  in  1893,  when  Canada  could  not  fail  to  be 
affected  by  the  acute  financial  convulsion  of  her  great  neigh- 
bor, the  United  States.  Several  Canadian  banks  have  their 
own  offices  in  New  York  and  the  others  have  agents  there 
as  well  as  in  London.  These  agencies  do  not  seek  business 
actively  in  New  York  and  London,  but  buy  and  sell  bills  of 
exchange  when  they  can  do  so  to  better  advantage  than  the 
parent  bank.  They  loan  more  or  less  on  call,  but  only  rarely 
on  time.  In  periods  of  stringency  they  have  several  times 
come  to  the  rescue  of  the  New  York  money  market,  when 
the  requirements  of  a  rigid  reserve  law  tied  the  hands  of  the 
American  banks.  Their  most  important  service  has  been, 
however,  to  their  parent  banks  when  the  pressure  of  an 
unusual  demand  has  led  the  latter  to  draw  upon  their  foreign 
balances.  These  balances  in  New  York  constituted  one  of 
the  best  liquid  assets  of  the  Canadian  banks  in  1893  and 
were  drawn  down  nearly  $8,000,000.  The  banks  sacrificed 
temporary  high  profits,  raised  their  interest  rates  no  higher 
than  seven  per  cent. ,  protected  their  regular  customers,  and 
while  their  neighbors  across  the  border  were  foundering  in 
the  waves  of  a  financial  crisis,  they  rode  the  storm  with  a 
serenity  which  might  have  justified  for  them  the  heroic 
motto  of  William  the  Silent,  Scevis  tranquillus  in  undis.1 

6.  Two  of  the  important  features  of  the  Canadian,  as 
well  as  of  the  Scotch  banking  system,  are  the  large  capital 
required  by  the  banks  and  their  system  of  branches.  While 
each  feature  is  capable  of  separate  discussion,  they  are  more 
or  less  connected  with  each  other,  from  the  fact  that  the 
requirement  of  a  large  capital  limits  the  number  of  the 
banks  and  makes  the  establishment  of  branches  necessary 
to  afford  banking  facilities  to  the  country.  The  minimum 
paid-up  capital  required  in  Canada  prior  to  the  revision  of 

1  Breckenridge,  451. 


THE   CANADIAN  BANKING  SYSTEM.  473 

1890  was  only  $100,000.  The  law  of  1890  required  sub- 
scriptions to  the  capital  stock  of  each  new  bank  to  an  amount 
of  not  less  than  $500,000  and  actual  payments  to  the  amount  of 
$250,000.  No  new  bank  is  permitted  to  begin  business  or  to 
issue  notes  until  it  has  satisfied  the  Treasury  Board  that  it 
has  paid  into  the  hands  of  the  Minister  of  Finance  at  least 
$250,000,  has  made  a  deposit  for  the  security  of  its  note 
issue,  and  has  otherwise  complied  with  the  provisions  of  the 
Bank  Act. l  The  paid-up  capital  of  the  thirty  active  Canadian 
banks  on  October  31,  1908,  was  $92,800,387,  or  an  average 
of  more  than  $3,000,000  to  each  bank.  The  paid-up  capital 
of  6,853  national  banks  in  the  United  States  on  September  23, 
1908,  was  $921,463,172,  or  an  average  of  about  $134,000  to 
each  bank.  The  capital  of  the  larger  Canadian  banks  was: 
Bank  of  Montreal,  $14,400,000  ;  Canadian  Bank  of  Commerce, 
$10,000,000;  Merchants'  Bank,  $6,000,000;  Imperial  Bank, 
$4,994,200;  Bank  of  British  North  America,  $4,866,666; 
Traders'  Bank,  $4,353,092;  Bank  of  Toronto,  $4,000,000; 
Dominion  Bank,  $3,980,000;  Royal  Bank,  $3,900,000.  The 
thirty  Canadian  banks  had,  however,  in  October,  1908, 
branches  in  Canada  to  the  number  of  1901,  of  which  908  were 
in  Ontario,  308  in  Quebec,  104  in  Nova  Scotia,  58  in  New 
Brunswick,  16  in  Prince  Bdward  Island,  162  in  Manitoba, 
103  in  Alberta,  137  in  Saskatchewan,  102  in  British  Columbia, 
and  three  in  Yukon.  The  remarkable  growth  of  Western 
Canada  is  indicated  by  comparison  with  the  figures  of  1896, 
when  there  were  only  43  branches  in  all  the  northwestern 
provinces,  where  the  number  in  1908  was  504.  Thus  Canada, 
with  about  6,000,000  inhabitants  in  1908,  was  equipped  with 
a  banking  office  for  about  every  3,150  people,  while  the 
United  States,  with  about  88,000,000  inhabitants,  had  only 
one  national  bank  for  about  every  13,000  people. 

The  experience  of  ten  years  between  the  Bank  Act  of  1890 
and  that  of  1900  suggested  several  improvements  of  detail  in 
the  law,  which  were  supplemented  by  additional  legislation 
after  the  American  crisis  of  1907.  The  new  measures  were 
largely  in  the  direction  of  co-ordination  and  mutual  support 

1  Revised  Statutes^  1906,  cb.  29,  sec.  15. 


474         HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

among  the  banks.  These  ends  were  accomplished  by  con- 
ferring important  powers  on  the  Canadian  Bankers'  Asso- 
ciation, which  had  been  organized  in  1892  as  a  private 
voluntary  association.  Under  its  original  powers,  the  asso- 
ciation consisted  of  the  various  banks,  with  their  officers  and 
employees,  and  acted  through  an  executive  council,  whose 
acts  were  subject  to  approval  or  veto  by  the  Association  at 
its  annual  meetings.1  This  Association  in  1900  was  given 
corporate  form  and  authorized  to  establish  clearing  houses 
and  to  make  rules  for  their  government,  subject  to  the 
approval  of  the  Treasury  Board  of  the  Dominion  Govern- 
ment. Authority  was  given  to  the  association  to  regulate 
the  making  and  issue  of  bank-notes  in  order  to  promote 
uniformity  and  prevent  fraudulent  over-issue.3  Up  to  1908 
the  action  taken  under  this  head  was  only  to  arrange  for 
returns  from  the  bank-note  printing  companies  of  monthly 
statements  of  notes  delivered  to  the  respective  banks  and  to 
compare  these  statements  with  similar  statements  from  the 
banks  of  notes  received  and  destroyed.  Many  Canadian 
bankers  favor  the  ultimate  introduction  of  the  American 
system,  by  which  a  central  authority  shall  control  absolutely 
the  making  and  cancellation  of  the  notes. 

Of  a  broader  character  were  the  provisions  of  the  Act  of 
1900  regarding  the  management  of  suspended  banks.  This 
subject  was  placed  substantially  under  the  control  of  the 
Canadian  Bankers'  Association,  by  conferring  upon  it  author- 
ity to  appoint  a  curator  to  conduct  the  affairs  of  a  suspended 
bank  until  it  might  resume  or  liquidate.  The  curator  thus 
appointed  is  subject  to  removal  by  the  Association.  He  has 
4 '  all  powers  and  shall  take  all  steps  and  do  all  things  neces- 
sary or  expedient  to  protect  the  rights  and  interests  of  the 
creditors  and  shareholders  of  the  bank,  and  to  conserve  and 


1  Breckenridge,  in  Quarterly  Journal  of  Economics,  August,  1900, 

XIV.,  545 

2  It  was  just  before  the   revision   of  1900  was  undertaken  that 
fraudulent  over-issues  of  notes  by   the  Banque    Ville   Marie   were 
discovered,    amounting    to  about  $300,000.  —  New    York  Bankers' 
Magazine,  March,  1900,  LX.,  334. 


THE   CANADIAN  BANKING  SYSTEM.  475 

ensure  the  proper  disposition,  according  to  law,  of  the  assets 
of  the  bank."  '  This  power  to  take  control  of  the  affairs 
of  a  suspended  bank  was  first  availed  of  in  1905  in  the  case  of 
the  failure  of  the  Bank  of  Yarmouth. 

Minor  amendments  of  the  law  in  1900  reduced  the  rate 
of  interest  on  the  notes  of  a  failed  bank  in  the  hands  of  the 
public  from  six  to  five  per  cent.,  and  imposed  a  charge  upon 
the  assets  of  the  failed  bank  of  three  per  cent,  upon  the 
amount  paid  for  the  redemption  of  notes  from  the  Bank  Cir- 
culation Redemption  Fund  beyond  the  amount  in  the  fund 
at  the  credit  of  the  bank.  Another  new  provision  prohibited 
the  issue  of  notes  during  a  period  of  suspension,  in  order  to 
convert  claims  of  favored  depositors  or  other  creditors  into  a 
first  lien.2  While  no  specific  provision  was  made  in  regard 
to  reserves,  an  opinion  has  grown  up  that  not  less  than 
fifteen  per  cent,  of  demand  liabilities  should  be  held  in  gold 
and  Dominion  notes,  and  banks  falling  materially  below  this 
proportion  are  admonished  by  the  Bankers'  Association.3 

The  rapid  growth  of  Western  Canada  created  a  demand 
for  currency  and  for  banking  accommodation  which  explain? 
the  expansion  of  note  circulation  and  banking  assets  in  the 
twentieth  century.  The  demand  for  currency  was  met  in 
part  by  the  issue  of  Dominion  notes,  which  were  absorbed 
into  bank  reserves  under  the  requirement  that  such  reserves 
should  consist  of  notes  in  the  proportion  of  at  least  forty  per 
cent.  The  Minister  of  Finance  proposed  in  1903  an  increase 
in  the  authorized  issue,  covered  by  a  twenty-five  per  cent, 
gold  reserve,  from  $20,000,000  to  $30,000,000.  Any  amount 
in  excess  may  be  issued  upon  the  deposit  of  gold  for  the  full 
amount.4  The  banks  held  total  reserves  of  both  specie  and 


1  Revised  Statutes,  1906,  ch.  29,  sec.  119. 

2  Act  of  63-64  Victoria,  ch.  26,  sec.  10. 

3  U.  S.  Consular  Reports,  May  14,  1907,  3.    Much  of  the  gold  used 
in  Canada  is  coin  of  the  United  States.    A  computation  made  in  1907 
put  the  amount  of  such  gold  in  the  Dominion  Treasury  at  $29,494,298, 
and  in  chartered  banks  at  $11,320,323,  being  respectively  about  80  and 
§7.56  per  cent,  of  total  specie  held. 

4  New  York  Bankers'  Magazine,  August,  1903,  LXVII.,  246. 


476        HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

notes  at  the  close  of  1897  to  tne  amount  of  $25,994,071. 
After  the  two  items  were  separately  stated,  under  the  law 
of  1900,  specie  holdings  on  December  3ist  increased  from 
$II»773>336  for  I9°°  to  $12,892,235  for  1902  and  $25,119,474 
for  1907.  The  increase  in  holdings  of  Dominion  notes  over 
the  same  period  was  from  $19,785, 173  for  1900  to  $24,730,575 
for  1902  and  $49,963,860  for  1907. 

In  spite  of  the  elasticity  of  the  Canadian  system,  it  did 
not  prove  quite  equal  to  the  combined  pressure  of  the  crop 
movement  of  1907  and  the  suspension  of  payments  by  the 
American  banks.  The  rapid  growth  of  the  Northwest  made 
the  financing  of  the  crop  movement  a  serious  undertaking 
even  in  the  absence  of  any  special  crisis.  It  was  the  practice 
of  the  banks  to  make  arrangements  to  accumulate  large  sup- 
plies of  notes  at  convenient  points,  with  Winnipeg  as  the 
chief  centre,  long  before  the  actual  date  for  the  movement 
to  begin.  The  farmer  bringing  his  wheat  to  the  grain  ele- 
vator would  receive  a  voucher  called  a  grain  ticket,  specify- 
ing the  weight  of  the  grain  sold  and  the  price  paid  for  it. 
These  tickets  were  cashed  both  by  banks  and  by  country 
storekeepers  from  the  stock  of  bank-notes  accumulated  for 
the  purpose.1  Bad  crop  conditions  in  the  autumn  of  1907 
combined  with  disturbances  in  the  United  States  to  curtail 
the  credits  thus  granted.  Appeal  was  made  by  Western 
boards  of  trade  and  the  Grain  Growers'  Association  of  Mani- 
toba to  the  government  for  assistance.  The  banks  at  first 
opposed  government  intervention,  but  a  plan  was  finally 
put  in  operation  which  had  general  approval. 

The  government  decided  to  exceed  the  legal  limit  of 
Dominion  note  issues  in  order  to  place  currency  at  the  com- 
mand of  the  farmers.  The  proposal  at  first  made,  that  these 
notes  should  be  advanced  directly  to  the  banks  in  the  crop- 
moving  district  upon  the  deposit  of  securities,  was  modified 
so  that  the  securities  were  submitted  through  the  Bank  of 
Montreal  as  intermediary.  The  Bank  of  Montreal  guaran- 
teed repayment  of  the  advances  made  to  the  other  banks. 

1  Triggc,  "  How  Canada  Provides  Currency  for  Moving  the  Crops," 
in  New  York  Bankers'  Magazine,  June,  1906,  LXXII.,  838. 


THE   CANADIAN  BANKING  SYSTEM.  4/7 

Interest  was  paid  by  the  banks  to  the  government  at  the 
rate  of  four  per  cent,  for  the  first  fifty  days,  five  per  cent, 
for  sixty  days,  and  six  per  cent,  for  any  longer  period.  The 
announcement  of  this  measure  allayed  anxiety  in  the  West 
and  permitted  the  prompt  movement  of  the  crops.  The 
amount  of  notes  issued  was  $5,315,000,  all  of  which  was 
piomptly  returned  and  cancelled  when  the  crisis  was  over.1 
Out  of  this  strain  upon  Canadian  banking  resources  grew 
a  further  extension  of  the  elasticity  of  the  note  issue,  by 
the  Act  of  July  20,  igoS.2  This  act  provided  in  substance 
for  additional  note  issues  under  a  heavy  tax.  The  authority 
to  make  such  issues  was  limited  to  the  period  from  October 
in  any  year  to  January  3ist  following,  and  the  rate  of  the 
special  tax  was  to  be  fixed  by  the  Governor  in  Council,  but 
at  not  more  than  five  per  cent.  The  proceeds  of  the  tax  go 
into  the  Consolidated  Revenue  Fund  of  Canada.  Notes  may 
be  issued  under  these  provisions,  upon  the  initiative  of  the 
bank,  but  the  amount  must  not  exceed  fifteen  per  cent,  of 
paid-up  capital  and  reserve  funds.*  This  authority  was  availed 
of  frequently  by  the  banks  during  the  following  four  years, 
but  failed  to  meet  entirely  the  great  increase  in  banking 
credit  required  by  agricultural  and  industrial  expansion.  A 
further  law  was  enacted,  therefore,  in  1913,  which  took 
effect  on  July  ist  of  that  year,  permitting  the  issue  of  bank- 
notes upon  deposits  of  gold  in  central  reserves.  Under  this 
law  it  became  possible  for  the  banks  to  increase  their  note 
issues  indefinitely,  at  any  time  of  the  year,  to  the  amount 
of  the  gold  or  Dominion  notes  deposited  in  the  central  gold 
reserves,  and  without  the  payment  of  any  tax.  While  it 
might  seem  that  such  issues,  being  fully  covered,  afforded 
no  room  for  profit  to  the  banks,  the  system  permitted  those 
banks  which  habitually  carried  strong  reserves  to  transform 
a  part  of  them  into  notes  without  essentially  weakening  their 

1  Ottawa  letter  in  New  York  Evening-  Post,  June  i,  1908,  I. 

2  Act  of  7-8  Edward  VII.,  cb.  7. 

3  It  was  stated  by  the  Minister  of  Finance,  while  the  bill  was  pend- 
ing, that  this  would  permit  an  issue  of  "  emergency  currency  of  $24,- 
619,385 — much  more  than  sufficient  to  meet  any  possible  contingency." 


478  H  1ST  OR  V  OF  MODERN  BANKS  OF  ISSUE. 

position.  The  use  of  this  privilege  was  easy  in  Canada  be- 
cause of  the  absence  of  legal  reserve  requirements,  and  the 
banks  very  generally  preferred  this  method  of  increasing 
their  issues  to  the  payment  of  the  high  tax  on  excess  issues 
authorized  by  the  law  of  1908.*  In  the  first  year  of  the 
new  provision,  1913,  the  month  of  November  closed  with 
gold  deposits  in  the  central  reserves  of  $8,100,000,  against 
which  notes  were  outstanding  to  the  amount  of  $5, 554, 634.' 

It  is  maintained  by  the  advocates  of  the  Canadian  system 
that  the  combination  of  large  capital  and  numerous  branches 
has  many  advantages.  It  secures  on  the  one  hand  a  unity 
of  policy  on  the  part  of  the  leading  banks  in  times  of  strin- 
gency far  different  from  the  playing  at  cross-purposes  which 
distinguished  the  action  of  the  national  banks  of  the  reserve 
cities  in  the  United  States  in  the  panic  of  1893.  The  Canadian 
system,  on  the  other  hand  enables  the  large  banks  to  dis- 
tribute accommodation  evenly  throughout  the  system,  to 
mass  currency  where  it  is  most  needed,  and  by  means  of  their 
power  of  note  issue  to  equip  every  branch  with  ample  re- 
sources for  sustaining  commercial  credit. 

Almost  inevitably,  with  the  development  of  large  enter- 
prises and  the  growth  of  capital  in  Canada  has  occurred  a 
concentration  of  banking  power  in  the  hands  of  a  few  of  the 
leading  banks  and  the  absorption  by  them  of  some  of  the 
smaller  local  institutions.  The  long  dominance  of  the  Bank 
of  Montreal,  which  gave  it  something  of  the  influence  of  a 
central  bank,  has  been  contested  in  recent  years,  in  point  of 
size  at  least,  by  the  Canadian  Bank  of  Commerce  and  the 
Royal  Bank  of  Canada,  each  of  which  has  resources  of  ap- 
proximately $200,000,000.  The  Royal  Bank  has  reached 
into  the  foreign  field  by  establishing  strong  branches  in 
Havana,  and  other  points  in  Mexico  and  the  West  Indies, 
and  by  the  acquisition  in  1912  of  the  Bank  of  British  Hon- 
duras and  in  1913  of  the  Bank  of  British  Guiana. 


'  Vide  New  York  Bankers*  Magazine,  July,  1913,  LXXXVIL, 
»/&*</.,  March,  1914,  LXXXVIIL,  291. 


22. 


THE   CANADIAN  BANKING  SYSTEM. 


479 


The  leading  items  of  the  accounts  of  the  Canadian  banks 
for  representative  years  have  been  as  follows ' : 


DHC.  3IST. 

NO.  BANKS. 

PAID-UP  CAPITAL. 

NOTE  CIRCULATION. 

DISCOUNTS. 

1841 

9 

$II,38O,OOO 

$  455,ooo 

$  16,400,000 

1851 

8 

14,480,000 

810,000 

27,800,000 

1861 

16 

24,410,796 

11,780,364 

39,588,842 

1867 

28 

32,500,162 

10,102,439 

54,899,142 

1873 

28 

57,931-359 

29,016,659 

119,647,350 

1876 

39 

66,137,315 

23,275,701 

122,562,334 

1880 

36 

59,819,603 

27,328,358 

105,587,672 

1885 

4i 

61,763,279 

32,363,992 

125,493,660 

1890 

38 

60,057,235 

35,006,274 

153,236,184 

1891 

38 

61,299,305 

35,634,129 

l86,59O,6O2 

1892 

39 

61,938,515 

36,194,023 

198,532.160 

1893 

39 

62,099,243 

34,418,936 

200,397,'498 

1894 

39 

61,683,719 

32,375,620 

195,836,141 

1895 

38 

62,196,39! 

32,565,179 

202,088,259 

1896 

38 

61,731,354 

33,095,784 

210,522,074 

1897 

38 

62,289,326 

37,985,123 

205,931,017 

1898 

38 

63,241,533 

40,258,381 

229,900,030 

1899 

38 

63,584,022 

45,999,753 

266,678,601 

1900 

36 

67,087,HI 

50,758,246 

295,726,182 

1901 

34 

67,59^  311 

54,372,788 

321,319,223 

1902 

35 

62,795,440 

60,574,144 

357,010,326 

1903 

33 

78,563,236 

62,539,407 

415,263,355 

1904 

34 

80,055,596 

64,507,394 

431,124,244 

I9°5 

34 

85,294,210 

69,98i,574 

489,238,325 

1906 

34 

95,509,015 

78,416,780 

585,158,711 

1907 

34 

95,995,482 

77,504,398 

579,516,639 

1908 

30 

96,457,573 

73,058,234 

511,808,909 

1909 

29 

97,808,617 

81,325,732 

592,741,812 

1910 

27 

99,676,093 

87,694,840 

667,064,829 

1911 

27 

107,994,604 

102,037,305 

774,909,172 

1912 

25 

114,881,914 

110,048,357 

881,331,981 

1913 

22 

114,809,297 

108,646,425 

822,387,973 

1  The  table  gives  only  a  general  view  of  the  progress  of  Canadian 
banking  operations,  without  permitting  absolutely  exact  comparisons, 
because  of  the  changes  in  the  form  of  the  official  reports  which  were 
made  in  1870,  1872,  1880,  and  1890.  The  figures  for  1841  and  1851  are 
reduced  from  pounds  sterling,  in  which  the  accounts  were  then  ex- 
pressed, and  with  those  of  1861  cover  only  the  Dominion  of  Canada, 
without  including  New  Brunswick  and  Nova  Scotia.  The  changes  in 
the  form  of  statement  affect  principally  the  item  of  discounts,  which 
included  substantially  all  loans  in  1867,  but  excluded  certain  advances 
on  securities  and  on  current  accounts  between  that  date  and  1890. 


CHAPTER  XVII. 

THE   BANKING  SYSTEM   OF  MEXICO. 

Early  Banking  Establishments  —  Comprehensive  Character  of  the 
Legislation  of  1897— The  System  of  State  Banks  of  Issue— The 
Adoption  of  the  Gold  Standard— Difficulties  which  were  Over- 
come—  The  Commission  of  International  Exchange  —  Question 
of  Establishing  an  Exchange  Fund — Importance  of  Avoiding  In- 
jury to  Mining  Interests — Growth  in  Banking  Business. 

THE  recent  monetary  history  of  Mexico  is  of  peculiar 
interest,  because  the  government  has  not  hesitated 
to  adopt,  both  in  banking  and  in  coinage,  construc- 
tive policies  differing  in  some  respects  from  those  of  most 
other  nations,  but  based  upon  careful  study  of  general  eco- 
nomic principles  as  adapted  to  the  special  conditions  prevail- 
ing in  the  republic.  Mexico  was  almost  without  banking  and 
monetary  organization  prior  to  the  second  election  of  Presi- 
dent Diaz  in  1884,  and  it  is  due  largely  to  his  foresight  and 
constructive  ability  that  she  has  been  dowered  with  both 
within  less  than  a  generation. 

Before  the  revision  of  the  Commercial  Code  in  1884  there 
had  been  no  general  banking  law  in  Mexico  and  such  bank- 
ing institutions  as  did  business  there  represented,  not  only 
foreign  capital,  but  foreign  management.  Prior  to  1864 
such  banking  as  was  carried  on  was  done  by  large  com- 
mercial houses  having  foreign  relations  and  often  took  the 
form  of  hazardous  speculation.  In  1864  came  the  first  real 
bank  in  the  form  of  a  branch  of  the  London  Bank  of  Mexico 
and  South  America.  This  institution  entered  Mexico  with- 
out authority  or  special  privileges  and,  while  it  was  subjected 
to  many  attacks,  it  succeeded  by  the  conservatism  and  sound- 

480 


THE  BANKING  SYSTEM  OF  MEXICO.  481 

ness  of  its  operations  in  introducing  to  a  limited  extent  the 
use  of  bank-notes.1  In  1881  a  concession  was  granted  by 
Congress  to  some  French  bankers  for  the  foundation  of  a 
bank  of  issue,  which  began  business  in  1884  under  the  name 
of  the  National  Bank  of  Mexico  and  engaged  to  perform 
the  banking  business  of  the  government.  The  capital  at  the 
foundation  was  $8, 000,000,  of  which  forty  per  cent,  was  paid 
up.2  The  National  Bank  encountered  violent  competition 
from  the  Mexican  Mercantile  Bank,  which  sprang  into  being 
without  special  concessions  and  continued  in  business  until 
1893,  when  it  was  absorbed  by  the  National  Bank.  This 
fusion  was  brought  about  by  pressure  from  the  govern- 
ment, and  the  capital  of  the  National  Bank  was  increased  to 
$20,000,000. 

The  revision  of  the  commercial  code  in  1884  provided 
against  the  further  creation  of  banks  without  concessions 
from  the  government  and  limited  the  right  to  accord  such 
concessions  to  the  Federal  authorities.  Those  banks  already 
in  existence,  including  several  in  the  State  of  Chihuahua, 
were  recognized  as  having  certain  vested  rights  and  were 
afterwards  referred  to  as  the  chartered  banks  in  distinction 
from  the  banks  which  were  given  exclusive  privileges  in  the 
states  in  which  they  were  established.  The  regulations  of 
1884  were  derived  in  part  from  the  American  law,  and  re- 
quired the  circulation  to  be  guaranteed  by  a  deposit  of  money 
or  securities  of  the  public  debt  to  the  amount  of  one-third  of 
the  notes.  The  defects  of  this  system  were  soon  recognized 
and  a  more  scientific  and  complete  code  was  substituted.3 

1  Favre,  Les  Banques  au  Mexique,  9. 

2  The  unit  of  value  in  Mexico  is  the  peso  or  dollar,  which  before 
the  decline  in  silver  bore  to  the  American  silver  dollar  the  proportion 
of  $1.012  in  value.      As  the  value  of  silver  bullion  declined,  the  gold 
value  of  Mexican  coins  declined,  approximately  pari  passu,  until  the 
monetary  reform  of  1905.     Values  herein  given  in  dollars  represent 
a  corresponding  number  of  Mexican  pesos,  without  regard  to  fluctua- 
tions in  their  gold  value. 

3  Sefior  Casasus,  who  wrote  the  masterly  report  upon  which  the  law 
of  1897  was  based,  declared  that  "the  very  worst  system  under  the 
empire  of  which  banks  of  issue  can  be  created  is  without  doubt  the 

31 


482         HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

It  was  by  the  law  of  March  19,  1897,  that  uniformity  was 
brought  effectively  into  the  banking  organism  of  Mexico  and 
a  system  adopted  conforming,  in  the  opinion  of  the  govern- 
ment, to  the  diversified  needs  of  the  country.  The  law  was 
one  of  the  results  of  the  constructive  policies  adopted  by  Seiior 
J.  Y.  I^imantour,  who  became  Minister  of  Finance  in  1893, 
having  for  their  aim  the  erection  of  Mexico  into  a  modern 
commercial  state.  Three  classes  of  incorporated  banks  were 
recognized  by  the  new  legislation — banks  of  issue,  mortgage 
banks,  and  banks  especially  designed  for  loans  to  agricul- 
turists. Only  the  first  class  concerns  us  here,  except  to  note 
the  fact  that  Seiior  L,imantour  recognized  the  principle  that 
banks  issuing  notes  should  deal  only  in  short-term  paper, 
while  the  mortgage  banks  were  authorized  especially  for 
the  purpose  of  issuing  obligations  for  those  enterprises  which 
required  time  and  the  permanent  investment  of  capital  for 
their  development.1 

The  principle  of  monopoly  of  issues  was  rejected,  because 
it  was  in  conflict  with  vested  rights  and  because  of  the  diver- 
sity of  interests  in  different  parts  of  Mexico.  In  the  place  of 
a  central  bank  of  issue  the  foundations  were  laid  for  a  quali- 
fied monopoly  in  each  of  the  thirty  states  of  the  republic,  by 
giving  to  the  bank  first  created  in  the  state  advantages  over 
later  competitors.  Capital,  dividends,  and  instruments  of 
credit  issued  by  such  a  bank  were  to  be  exempt  from  all 
taxes,  federal  or  local,  except  the  stamp  tax,  and  even  the 
latter  was  not  to  exceed  five  centavos  in  any  case  for  the 
privileged  banks,  while  it  might  be  much  higher  for  all 
others.  These  later  comers  in  states  already  having  banks 
of  issue  were  subject  not  only  to  all  local  and  federal  taxes, 
but  were  required  specifically  to  pay  two  per  cent,  annually 
upon  their  capital.3  Finally,  it  was  prohibited  to  any  bank 

American  system,  because  it  has  made  the  state  the  sole  body  which 
issues  notes  and  because  it  has  provided  the  public  debt  as  their 
guarantee." — Les  Institutions  de  Credit,  189. 

1  Favre,  Les  Banques  au  Mexique,  20. 

9  The  New  Banking  Law  of  the  Republic  of  Mexico,  Articles  121- 
129.  The  exemptions  were  only  for  twenty-five  years  from  the  date 
of  the  law. 


THE  BANKING  SYSTEM  OF  MEXICO.  483 

to  establish  branches  outside  the  state  where  it  was  established 
without  special  authority  from  the  Ministry  of  Finance. 

The  notes  of  the  Mexican  banks  are  a  first  lien  upon 
their  assets,  after  claims  of  the  government  and  certain 
obvious  legal  exemptions.1  The  assets  of  the  banks  are 
left  in  their  own  custody,  but  subject  to  certain  requirements 
as  to  their  character  and  as  to  reserves  held.  In  the  revision 
of  1897  Sefior  Limantour  definitely  rejected  the  principle 
which  had  been  adopted  from  the  American  law  in  the  code 
of  1884,  that  the  reserve  of  one- third  against  circulation  might 
consist  of  money  or  securities.  Conscious  that  the  financial 
fate  of  the  country  should  not  be  linked  with  its  political 
disturbances,  he  said 2 : 

What  would  be  the  influence  of  such  a  deposit  [of  securities]  upon 
the  credit  of  a  bank  in  a  case  where,  in  consequence  of  the  vicissitudes 
of  policies  domestic  or  foreign,  the  securities  of  the  state  should 
precipitately  decline?  Would  it  not  enhance  rather  the  intensity 
of  the  evil,  by  the  fall  in  the  value  of  the  guarantee  at  the  very 
moment  when  the  general  crisis  paralyzed  transactions,  when  cash 
disappeared,  and  payments  were  accomplished  with  difficulty  ? 

Convinced  of  the  soundness  of  this  view,  Sefior  Limantour 
required  the  banks  in  the  new  law  to  maintain  actual  cash 
to  the  amount  of  fifty  per  cent. ;  but  he  went  farther  than  to 
require  it  against  circulation  alone  and  required  it  against 
the  aggregate  of  outstanding  notes  and  of  deposits  payable 
on  demand  or  within  three  days.  The  deposits  as  interpreted 
by  Mexican  law,  did  not,  however,  include  the  current  ac- 
counts opened  in  favor  of  clients  and  carried  to  their  credit. 
The  issue  of  bank  notes  was  permitted  under  these  conditions 
to  the  amount  of  three  times  banking  capital.  If  circulation 
should  exceed  this  limit,  the  bank  would  first  be  warned  to 
cease  advances  until  the  proper  ratio  of  circulation  should  be 
restored,  and  if  after  forty-five  days,  at  the  maximum,  con- 
ditions should  continue  contrary  to  law,  the  concession  of 
the  bank  would  be  forfeited.3 

1  The  New  Banking  Law,  Art  25. 

3  Favre,  40. 

3  The  New  Banking  Law,  24. 


484         HISTORY  OF  MODERN  BAMCS  OF  ISSUE. 

The  minimum  capital  of  a  bank  of  issue  was  fixed  by  the 
law  of  1897  at  500,000  pesos  ($250,000)  and  it  was  provided 
that  the  privileges  granted  by  the  law  should  terminate  after 
thirty  years.  The  notes  of  the  Mexican  banks  are  not  legal 
tender  and  are  redeemable  in  coin  on  demand  at  the  office 
where  they  are  issued.  The  maximum  period  of  discount 
allowed  to  the  banks  of  issue  is  six  months,  and  paper  dis- 
counted must  bear  at  least  two  signatures.1  The  system  of 
discounting  commercial  paper  is  not,  however,  widely  in 
vogue  in  Mexico.  It  is  replaced  by  a  system  of  advances  to 
the  client  of  the  bank,  upon  the  deposit  of  the  paper  as 
security,  and  these  advances  are  often  made  for  nine  months 
or  a  year.3  The  banks  are  required  to  publish  their  balance 
sheets  monthly  in  the  Official  Journal,  and  the  form  in  which 
the  various  items  shall  be  stated  is  carefully  prescribed. 
They  are  also  subjected  to  a  comprehensive  system  of  inspec- 
tions, which  in  1904  was  placed  under  the  direction  of  an 
inspector-general.3  Ten  per  cent,  of  profits  is  required  to  be 
added  annually  to  the  surplus  until  one-third  of  the  capital 
is  attained. 

The  execution  of  the  law  of  1897  was  contrary  to  the 
privileges  of  the  National  Bank  of  Mexico,  which  included 
the  pledge  of  the  government  that  it  would  not  permit  the 
creation  of  additional  banks  of  issue.  Negotiations  took 
place,  however,  which  led  the  bank  to  waive  this  privilege 
and  in  addition  to  increase  its  advances  to  the  Treasury  from 
2,000,000  to  4,000,000  pesos,  to  reduce  from  two  to  one 
and  three-quarters  per  cent,  the  commission  charged  upon 
the  Treasury  service,  and  from  two  per  cent,  to  one  per  cent, 
the  commission  for  the  service  of  the  debt.  In  return  for 

1  The  extension  of  the  reserve  requirement  to  deposits  and  the 
lengthening  of  the  term  of  the  commercial  paper  held  are  represented 
by  Scnor  Casasus  as  mutual  concessions.  He  says  regarding  the  six 
months'  limit  for  paper  that  "  the  commercial  customs  of  the  republic 
are  not  in  this  respect  like  the  European  practice,  which  has  served 
as  a  standard  to  the  economists  who  have  studied  the  mechanism  of 
banks  of  issue." — Les  Institutions  de  Cr&dit,  490. 

9  Favre,  45. 

3  Ibid.,  33- 


THE  BANKING  SYSTEM  OF  MEXICO.  485 

these  concessions,  it  obtained  an  extension  of  its  charter  for 
fifteen  years,  carrying  it  to  1949,  and  the  suspension  for  ten 
years  of  the  right  of  the  Mont  de  PUte  to  issue  certificates  of 
deposit  or  bills  payable  to  bearer.1  With  branches  scattered 
all  over  Mexico,  which  were  not  interfered  with  by  the  new 
law,  and  retaining  the  function  of  banker  for  the  state,  the 
National  Bank  continued  to  be  one  of  the  most  potent 
organs  of  foreign  investors  in  Mexico,  and  in  1906,  under 
the  stimulus  of  the  adoption  of  the  gold  standard  was  able  to 
increase  its  capital  by  17,000,000  pesos. 

Another  organ  which  grew  logically  out  of  the  new  order 
of  things,  and  which  has  done  much  to  bring  about  harmony 
and  co-operation  between  the  banks,  was  the  creation  in 
February,  1899,  of  the  Central  Bank  of  Mexico  (Banco 
Central  Mexicand).  It  was  the  purpose  of  this  bank  to 
afford  a  means  of  union  between  the  scattered  state  banks 
and  incidentally  to  facilitate  the  clearing  of  their  notes  and 
other  obligations.  To  this  end  it  was  provided  that  a  state 
bank  which  wished  to  avail  itself  of  the  privileges  offered  by 
the  Central  Bank  should  subscribe  at  least  one-tenth  of  its 
capital  to  the  capital  of  the  new  institution.  As  it  was  not 
intended  to  preclude  the  subscription  of  capital  from  other 
sources,  the  shares  were  divided  into  two  classes,  those  held 
by  the  banks,  which  could  not  be  alienated,  and  those  of 
private  shareholders,  which  might  be  converted  into  the 
former  class  when  deposited  for  that  purpose  by  a  bank.3 
Under  the  contracts  made  with  the  local  banks,  each  local 
bank  maintains  an  account  with  the  Central  Bank,  which 
may  be  in  favor  of  the  local  bank  or  against  it.  Different 
rates  of  interest  are  charged  or  paid  under  different  conditions. 
The  Central  Bank  buys  bills  from  the  local  banks  to  the 


1  Favre,  61.  It  was  declared  in  December,  1907,  by  the  Minister 
of  Finance,  that  "the  importance  of  the  role  played  by  the  National 
Bank  in  our  system  of  credit  as  a  reserve  bank  is  becoming  daily 
more  manifest,  as  is  also  the  fact  that  its  large  cash  holdings  and  its 
conservative  policy  afford  the  most  solid  guarantees  to  the  business 
interests  of  the  country." — Budget  for  the  Fiscal  Year  1908-09,  15. 

8  Favre,  64. 


486         HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

amount  of  the  credit  which  has  been  granted  them,  but  may 
refuse  those  which  it  considers  unacceptable.  The  Central 
Bank  and  the  local  banks  aid  each  other  in  making  collec- 
tions, and  the  Central  Bank  represents  the  local  banks  in 
dealing  with  the  Federal  Government.  Special  provision  is 
made  for  unusual  pressure  upon  any  bank  in  the  system. 
As  soon  as  an  appeal  is  received  on  this  ground,  the  Central 
Bank  telegraphs  immediately  to  the  other  banks,  who  are 
bound  to  create  at  the  Central  Bank  a  fund  equal  to  fifty  per 
cent,  of  the  capital  of  the  threatened  bank,  but  not  in  excess 
of  two  per  cent,  of  the  capital  of  the  contributing  banks. 
This  fund  is  employed  in  buying  at  par  the  bills  of  the 
threatened  bank,  which  pays  for  the  amounts  advanced  at 
the  rate  of  twelve  per  cent. 

The  work  of  putting  the  banking  system  upon  a  modern 
basis  had  hardly  been  achieved  when  Senor  Limantour  turned 
his  attention  to  the  subject  of  the  metallic  standard.  Mexico 
had  been  upon  the  silver  basis  from  the  times  of  the  Spanish 
conquest  and  its  standard  coins  had  found  their  way  through 
the  gateways  of  Europe  and  the  Philippines — which  was  at 
one  time  an  appanage  of  Mexico — into  China,  Japan,  and 
most  of  the  countries  of  the  China  Sea.1  But  the  gradual 
fall  in  the  gold  price  of  silver,  accentuated  in  1902  by  the 
lowest  level  ever  touched  by  the  metal,  convinced  Senor 
Ivimantour  and  his  advisers  that  Mexico  must  follow  other 
advanced  nations  onto  the  gold  basis.  The  public  finances 
were  deranged  by  the  fall  of  silver,  because  much  of  the 
foreign  debt  of  the  country  had  been  contracted  in  gold,  and 
the  import  trade  had  been  reduced  almost  to  gambling  be- 
cause exchange  with  gold  countries  had  become  so  fluctua- 
ting. More  important  still  was  the  effect  of  the  fall  of  silver 

i  Casasus  maintains  that  the  amount  of  Mexican  coin  reaching  the 
Bast  by  way  of  the  Philippines  did  not  go  beyond  an  annual  average 
of  $  1,000,000,  but  that  in  colonial  times  the  coins  first  went  to  Spain 
and  then  flowed  to  the  Bast  "  through  three  principal  highways, 
firstly,  trade  with  the  Levant,  Bgypt,  and  the  Red  Sea ;  secondly, 
maritime  commerce  with  the  great  Indies  and  China;  and  thirdly, 
Russia's  trade  with  China  and  Tartary."  —  Currency  Reform  in 
Mexico,  339. 


THE  BANKING  SYSTEM  OF  MEXICO.  487 

and  its  incessant  fluctuations  upon  the  earnings  of  the  rail- 
ways and  the  refusal  of  foreign  capital  from  gold  countries 
to  embark  in  the  extension  of  the  railway  network  or  in  other 
Mexican  enterprises.  While  many  local  enterprises  profited 
after  a  fashion  from  the  rise  in  exchange,  the  railways  were 
governed  by  official  rates,  which  the  government  only  tardily, 
in  1902,  authorized  them  to  change.1 

Confronted  by  these  conditions,  Minister  L,imantour  ob- 
tained the  approval  of  President  Diaz  for  the  appointment  of 
a  monetary  commission  to  investigate  all  phases  of  the  sub- 
ject of  the  metallic  standard.2  While  this  commission  was 
at  work  in  Mexico,  beginning  in  the  spring  of  1903,  another 
step  was  taken  by  the  Mexican  Government,  designed  to 
secure  a  certain  degree  of  international  co-operation  in  estab- 
lishing more  stable  exchange  between  other  silver-using 
countries  and  gold-standard  countries.  Notes  substantially 
identical  in  language  were  addressed  in  January,  1903,  by 
the  representatives  of  China  and  Mexico  to  the  Government 
of  the  United  States,  asking  the  aid  of  the  latter  in  presenting 
the  subject  to  those  governments  having  commercial  and 
territorial  interests  in  the  Orient.  It  was  pointed  out  that 
the  imports  of  certain  silver-using  countries  reached  a  total 
of  $574,627,323  (in  United  States  gold  coin),  and  that  "the 
problem  of  securing  relative  stability  of  exchange  between 
the  gold  and  silver  countries  is  one  whose  importance  is 
not  limited  to  silver  countries,  but  comes  home  with  force 


1  The  companies  obtained  the  right  to  increase  rates  by  fifteen  per 
cent,  when  exchange  on  New  York  was  above  220— Viollet,  82.  Al- 
though gross  earnings  of  all  Mexican  lines  had  increased  from  $22,- 
220,191  in  1893  to  $40,853,981  in  1900,  net  earnings  per  mile  in  gold 
had  fallen  off.  In  the  case  of  the  Mexican  Central  net  earnings  per 
mile  in  1893  of  $1498  (gold)  had  declined  in  1901  to  $1029.— Casasus, 
Currency  Reform  in  Mexico^  215-17. 

8  President  Diaz  was  at  first  reluctant  to  take  up  so  far-reaching  a 
subject,  feeling  that  the  many  constructive  measures  which  he  had 
carried  out  for  the  benefit  of  his  country  entitled  him  to  a  certain 
degree  of  repose  in  his  declining  years ;  but  was  finally  persuaded 
by  Minister  I^imantour  and  Mr.  Enrique  C.  Creel  to  take  the  initial 
steps. 


488          HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

to  all  those  gold-standard  countries  which  are  seeking  mar- 
kets for  their  products  in  silver  countries  and  are  seeking 
the  extension  of  their  trade  in  the  Orient.1 

The  Government  of  the  United  States  responded  favorably 
to  this  appeal  and  President  Roosevelt,  under  authority  of 
Congress,  appointed  a  commission  of  three  members  to  co- 
operate with  a  commission  appointed  by  Mexico  to  present 
the  subject  to  other  governments.2  These  commissions 
visited  successively  London,  Paris,  The  Hague,  Berlin,  and 
St.  Petersburg,  where  they  conferred  with  commissions  ap- 
pointed for  the  purpose.  The  result  of  the  American  mission 
was  an  agreement  between  representatives  of  all  the  govern- 
ments visited — those  of  Great  Britain,  France,  the  Nether- 
lands, Germany,  and  Russia — which  was  well  expressed  by 
the  first  resolution  adopted  at  London  3 : 

That  the  adoption  in  silver-using  countries  of  the  gold  standard 
on  the  basis  of  a  silver  coin  of  unlimited  legal  tender,  but  with  a  fixed 
gold  value,  would  greatly  promote  the  development  of  those  countries 
and  stimulate  the  trade  between  those  countries  and  countries  already 
possessing  the  gold  standard,  besides  enlarging  the  investment  oppor- 
tunities of  the  world. 

There  was  not  absolute  agreement  among  the  various 
Powers  in  regard  to  the  best  means  of  reaching  this  result, 
but  in  most  cases  it  was  agreed  that  the  ratio  of  32  to  i 
should  be  adopted  as  the  relation  between  the  gold  standard 
and  the  new  silver  coins.  This  fundamental  resolution  was  an 
endorsement  of  the  principle  of  the  gold-exchange  standard. 

Not  much  more  than  a  moral  effect  was  anticipated  by  the 
Government  of  Mexico  from  the  efforts  made  abroad.  Public 
opinion  was  still  sensitive  in  the  United  States,  and  to  some 
extent  in  Europe,  against  international  bimetallism,  for 

1  Commission  on  International  Exchange,  1903,  39. 

2  The  members  of  the  American  commission  were  Hugh  H.  Hanna 
of  Indiana,  Charles  A.  Conaut  of  New  York,  and  Professor  Jeremiah 
W.  Jenks  of  New  York.     The  members  of  the  Mexican  commission 
were  Enrique  C.  Creel,  President  of  the  Banco  Central ;  Luis  Camacho, 
financial  representative  of  Mexico  in  London  ;  and  Eduardo  Meade  of 
San  Luis  Potosi. 

3  Report  of  the  Commission  on  International  Exchange,  fooj,  p.  141. 


THE  BANKING  SYSTEM  OF  MEXICO.  489 

which  the  United  States  had  made  their  last  abortive  effort 
in  1897.'  It  was  expressly  declared,  therefore,  in  both  the 
Mexican  and  Chinese  memoranda  to  the  United  States,  that 
it  was  not  the  expectation  or  the  wish  "that  the  gold  stand- 
ard countries  should  take  any  action  tending  to  impair  their 
monetary  standard  or  to  make  material  changes  in  their 
monetary  systems.2  One  of  the  objects  sought,  however, 
was  to  bring  about  greater  regularity  in  the  purchase  of  silver 
bullion  by  different  powers,  when  required  for  coinage  pur- 
poses, in  order  to  diminish  fluctuations  in  exchange  with 
silver  countries.  The  soundness  of  this  policy  was  recog- 
nized by  the  British  Government  and  was  afterwards  adopted 
on  a  large  scale  in  purchases  of  silver  for  India.3 

While  the  Commission  on  International  Exchange  was 
pursuing  its  mission  in  Europe,  the  commission  appointed 
to  study  the  subject  at  home  continued  its  inquiries  through 
several  sub-committees.  The  fourth  sub-committee,  which 
was  charged  with  analyzing  the  effects  of  the  fall  of  silver, 
reported  in  favor  of  a  system  of  stable  exchange  for  Mexico 
at  a  ratio  of  33  to  i.  The  full  commission  held  its  final 
sitting  on  February  10,  1904,  and  in  its  report  recommended 
the  adoption  of  a  system  based  on  the  gold  standard.  They 
did  not  advise  the  adoption  of  a  gold  currency,  but  of  a 
system  which  would  keep  silver  in  circulation  in  quantities 
as  large  as  possible  without  impairing  the  maintenance  of 
the  ratio  with  gold  which  might  be  adopted.  To  these  ends 
it  was  recommended : 

(i)    That  the  mints  be  closed  to  the  free  coinage  of  silver, 


1  Vide  "Statement  respecting  the  Work  of  the  Recent  International 
Bimetallic  Commission,"  by  Senator  Wolcott  of  Colorado,  in  United 
States  Senate,  January  17,  1898.    It  was  then  proposed  to  the  Govern- 
ment of  British  India  that  it  should  retrace  the  steps  of  1893  by  again 
opening  its  mints  to  free  coinage  of  silver,  but  this  was  met  by  a 
"unanimous  and  decided  opinion"  on  the  part  of  the  government 
against  such  action. — Commission  on  International  Exchange^  1903, 
303. 

2  Commission  on  International  Exchange,  zooj,  45. 

3  Vide  infra,  Ch.  XXI. 


490         HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

and  that  the  reimportation  of  Mexican  pesos  be  prohibited 
after  proper  delay ; 

(2)  That  a  ratio  be  established  between  gold  and  silver 
based  upon  the   average  gold  price  of  silver  for  the  pre- 
ceding ten  years,  which  should  not  be  raised  more  than  ten 
per  cent. ; 

(3)  That  gold  should  not  at  first  be  coined  for  either  the 
government  or  individuals,  but  that  such  coinage  should  be 
deferred  until  the  new  coin  should  have  attained  parity  with 
gold  and  when  in  the  opinion  of  the  government  the  circu- 
lation of  gold  would  not  impair  the  maintenance  of  this 
parity.1 

A  plan  for  carrying  out  these  ideas  was  presented  to 
Congress  by  Minister  Limantour  on  November  16,  1904, 
which  reviewed  all  sides  of  the  discussion  which  had  been 
taking  place  in  Mexico,  frankly  discussed  the  merits  and 
defects  of  the  old  system,  and  pointed  out  the  means  of 
establishing  the  new.  In  this  report  the  argument  that  the 
export  trade  profited  by  a  depreciating  currency  was  exam- 
ined and  found  to  have  little  foundation  in  the  commercial 
history  of  Mexico.  It  was  the  conclusion  of  the  minister 
that  the  expansion  of  the  mining  industry,  though  facilitated 
by  the  depreciation  of  the  local  currency,  could  not  be 
ascribed  to  that  as  the  chief  cause,  but  to  other  causes,  fore- 
most among  which  were  the  construction  of  railways  into 
n^w  regions,  the  cheapening  of  transportation  rates,  and 
modern  methods  of  treating  the  ores.  Turning  to  the  figures 
of  gross  export  trade,  it  was  pointed  out  that  during  the  ten 
years  ending  with  1891,  when  the  fluctuations  in  the  gold 
value  of  silver  were  slight,  total  exports  rose  from  $26, 000,000 
to  $53,000,000  in  American  gold,  while  for  the  ten  years 
ending  with  1901,  during  which  the  value  of  the  Mexican 
peso  fell  from  84  to  48  cents  in  gold,  the  increase  in  the  value 
of  exports,  reduced  to  gold,  was  only  from  $63,000,000  to 
$77,000,000,  or  about  twenty-two  per  cent.2  The  Minister 

1  Commission  on  International  Exchange,  foo#,  419. 

2  Monetary  Reform  in  Mexico,  4.     This  subject  was  discussed  and 
similar  conclusions  reached  in  a  paper  submitted  to  the  Mexican 


THE  BANKING  SYSTEM  OF  MEXICO.  49! 

did  not  adopt,  in  terms,  the  conclusion  of  members  of  the 
American  Commission  in  1903,  that,  under  the  system  of  a 
falling  monetary  unit,  "  Mexico  had  in  recent  years  given 
up  a  growing  proportion  of  the  products  of  her  own  labor 
and  intellectual  efficiency  in  return  for  foreign  products ' '  ; 
but  in  his  report  in  the  autumn  of  1905  he  brought  out  the 
corollary  of  this  proposition,  that  the  rise  in  the  unit  in  1905 
enabled  Mexico  "  to  purchase  a  much  larger  quantity  of 
foreign  merchandise  without  any  very  material  increase  in 
our  remittances  abroad."  1  An  important  factor  in  the  pro- 
gress of  recent  years,  too  often  ignored  by  those  who  ascribed 
this  progress  to  the  silver  standard,  was  the  abolition  of  the 
alcabalas,  or  interior  customs  taxes  at  state  lines.  It  was 
not  until  the  middle  of  the  year  1896  that  this  reform  was 
effected,  with  the  result  of  relieving  commerce  from  a  galling 
exaction  and  greatly  stimulating  the  public  revenue  from 
other  sources. 

A  measure  to  carry  out  the  reforms  proposed  by  Minister 
Limantour  was  submitted  with  his  report  and  became  law 
on  December  9,  1904.  This  law  declared  that  the  existing 
silver  coin,  containing  24.4391  grams  of  pure  silver  and 
2.6342  grams  of  copper  should  continue  to  possess  full  legal- 
tender  powers,  but  that  it  should  have  a  value  equal  to 
75  centigrams  of  pure  gold.  The  issue  of  money  of  all  kinds 
was  reserved  to  the  executive,  who  was  also  clothed  with 
authority  to  forbid  or  tax  the  importation  of  Mexican  pesos 
into  the  republic ;  to  continue  coinage  of  old  pesos  for  ex- 
port; to  modify  the  form  of  the  peso;  to  authorize  the 

Commission  by  the  present  writer,  Professor  Jenks,  and  Mr.  Edward 
Brush,  April  18,  1903.  See  Commission  on  International  Exchange, 
1903,  431-39.  It  was  also  discussed  exhaustively  by  Senor  Casasus, 
Currency  Reform  in  Mexico,  193-239.  On  the  same  subject  in  other 
countries,  vide  the  author's  Principles  of  Money  and  Banking,  I., 

347-51- 

1  Financial  Documents,  1905,  4.  The  Minister  calculated  that 
exports  valued  in  silver,  amounting  for  the  fiscal  years  1903,  1904, 
and  1905  to  $207,377,793,  $210,312,374,  and  $208,520,451  respectively, 
worked  out  in  gold  value,  at  the  average  rate  of  exchange,  at 
$82,950,000,  $91,440,000,  and  $101,710,000  respectively. 


492          HISTORY  OF  MODLRN  BANKS  OF  ISSUE. 

circulation  for  a  limited  time  of  the  gold  money  of  other 
nations ;  to  modify  the  mining  laws  by  reducing  the  charge 
of  two  per  cent,  upon  coinage,  the  stamp  tax  of  three  per 
cent. ,  and  the  charges  for  assaying,  smelting,  and  refining ; 
to  modify  the  taxes  on  mine  titles  and  various  local  taxes ; 
to  exempt  mining  machinery  from  import  duties ;  to  arrange 
for  advances  upon  silver  bullion  and  for  its  sale  under  favor- 
able conditions  at  home  and  abroad,  and  to  create  a  com- 
mission for  the  purpose  of  maintaining  stability  of  exchange, 
to  which  should  be  confided  a  special  fund  to  be  created  by 
the  executive  and  such  powers  as  the  executive  thought 
proper. l 

Sweeping  as  these  measures  were,  they  indicated  a  certain 
division  of  opinion  as  to  the  effective  steps  required  for 
maintaining  parity.  Although  Mr.  Creel,  chairman  of  the 
Commission  on  International  Exchange,  had  urged  that 
exchange  funds  should  be  established  in  New  York  and 
Kurope,  and  had  upon  this  point  been  vigorously  supported 
by  members  of  the  American  commission,  he  was  overruled 
by  the  majority  of  his  associates.2  Minister  I^imantour  ac- 
cepted in  a  tentative  way  the  view  of  the  majority,  that  the 
appreciation  of  the  silver  peso  to  gold  parity  could  be  brought 
about  by  scarcity,  but  by  the  institution  of  the  commission 
on  money  and  exchange  the  view  was  recognized  that  some- 

1  The  text  of  this  bill  (in  English)  is  given  in  Monetary  Reform  in 
Mexico,  24-25,  and  in  the  Report  of  the  Commission  on  International 
Exchange,  1904,  449-50. 

2  Considerable  divergence  of  opinion  existed  even  among  the  advo- 
cates of  an  exchange  fund  as  to  just  how  it  should  be  constituted. 
Senor  G.  Raigosa  supported  substantially  the  plan  recommended  by 
the  present  writer  for  the  Philippines  and  quoted  copiously  the  criti- 
cisms of  the  Indian  policy  of  relying  upon  scarcity  to  raise  the  value 
of  the  coin.    Senor  Casasus  believed  it  would  be  necessary  to  negotiate 
a  considerable  foreign  loan,  but  all  three  subscribed  to  the  declaration 
that  "a  stock  of  gold,  whether  in  circulation  or  held  in  deposit,  owing 
to  the  fact  that  it  consists  of  exportable  coins,  is  the  only  guarantee  for 
the  stability  and  safe  operation  of  a  monetary  regime  based  on  the 
artificial  elevation  of  the   value  of  a  coin  due  to  the  suspension  of 
free  coinage." — See  Commission  on  International  Exchange,  1904, 
352-390- 


THE  BANKING  SYSTEM  OF  MEXICO.          493 

thing  more  than  scarcity  must  be  relied  on,  under  all  the 
conditions  of  international  trade  and  the  money  market,  to 
maintain  permanently  a  parity  once  attained.  It  will  be  seen 
in  the  sequel  that  while  events  moved  propitiously  for  the 
achievement  of  the  reform,  the  work  of  the  exchange  com- 
mission attained  an  importance  which  contributed  much  to 
assure  this  success. ' 

The  event  which  contributed  most  to  allay  doubts  and  to 
permit  the  government  to  advance  from  the  ground  of  ex- 
periment to  that  of  accomplishment  was  the  rise  in  the 
price  of  silver  bullion.  The  hiatus  in  the  demand  for  the 
metal  which  had  carried  its  price  down  to  21  \\  pence  in 
December,  1902,  and  January,  1903,  was  at  length  passed, 
and  during  the  period  from  April,  1903,  to  the  beginning 
of  1905  silver  moved  slowly,  but  almost  uninterruptedly, 
upward.1  In  January,  1905,  the  L,ondon  price  was  28| 
pence — an  advance  of  nearly  one-third  over  the  low  point  of 
1903.  On  March  25,  1905,  therefore,  although  silver  had 
then  receded  to  about  26  pence,  the  new  gold  standard  was 
put  into  effective  operation.  A  step  towards  the  policy  of 
India  was  introduced  into  one  of  the  laws  now  promulgated 
by  the  provision  that  henceforth,  except  for  recoinage,  new 
silver  money  should  be  issued  only  in  exchange  for  gold  coin 
or  bars  at  the  legal  parity.  It  was  wisely  provided  that  this 
exchange  of  silver  for  gold  should  cease  to  be  obligatory 
when  silver  rose  above  the  legal  parity. 

In  spite  of  Seiior  I,imantour's  confidence  in  scarcity  as  a 
means  of  bringing  about  parity,  a  fund  was  constituted  by 
Section  27  of  one  of  the  new  laws,  called  "Fund  for  the 
regulation  of  the  monetary  circulation,"  with  the  avowed 
object  of  facilitating  the  adaptation  of  the  monetary  circula- 
tion to  the  requirements  of  stability  in  foreign  exchange. 


1  Viollet,  while  pointing  out  the  difference  between  the  attitude  of 
Senor  Litnantour  and  the  present  writer  on  this  subject,  intimated 
that  Senor  lyimantour  may  have  had  for  his  attitude  a  motive  which  was 
tmavowed. — Le  Probltme  de  V  Argent  et  V  Etalon  d'Or  au  Mexique^ 
199-201. 

8  Commission  on  International  Exchange \  1904,  28. 


494         HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

At  the  same  time  (April  3,  1905),  a  commission  of  money 
and  exchange  was  created  and  a  fund  of  10,000,000  pesos 
was  placed  under  its  control,  deposited  in  part  at  the  National 
Bank  of  Mexico  and  in  part  at  the  other  principal  foreign 
banks.  These  funds  were  destined  to  support  exchange  by 
enabling  the  commission  to  buy  or  sell  gold  drafts  according 
to  the  state  of  the  market. ! 

The  work  of  the  commission  was  given  an  entirely  different 
direction  from  what  was  expected  by  the  continued  rise  in  the 
price  of  silver  bullion,  and  by  the  close  of  1905  Mexico  was 
not  only  firmly  established  upon  the  gold  standard,  but  was 
beginning  to  import  gold  in  payment  for  her  exports  of  silver. 
Up  to  the  year  1904  exchange  on  New  York  had  fluctuated 
in  harmony,  more  or  less  exact,  with  the  markets  for  silver 
bullion.  During  the  latter  half  of  1904,  however,  this  ex- 
change became  practically  fixed  at  $2.16  in  Mexican  money 
for  $1.00  in  United  States  gold.2  The  reason  was  in  part 
the  rise  in  silver,  but  was  also  in  part  the  known  purpose  of 
Mexico  to  establish  soon  the  relation  of  two  to  one.  With 
the  further  rise  in  silver  in  1905,  which  carried  the  average 
Condon  quotation  for  the  metal  to  27^!  pence  for  the 
year,  and  to  a  maximum  of  33}  pence  early  in  1906,  it 
became  no  longer  a  question  of  maintaining  the  value  of  the 
silver  coins,  but  of  keeping  them  down  to  the  gold  value 
fixed  by  law. 

The  first  importations  of  gold  were  encouraged  by  the 
government,  in  order  to  enable  the  banks  to  diversify  their 
reserves,  but  before  the  close  of  1906  the  golden  stream  had 
become  a  torrent,  and  silver  coins  were  freely  exported  be- 
cause the  market  price  of  their  bullion  contents  was  above 
their  legal  value  in  Mexico.  The  cash  holdings  of  the  banks 
were  $74,035,198  (Mexican  currency)  in  July,  1905,  and 
were  almost  wholly  in  silver.  By  January,  1906,  the  amount 


1  Viollet  declares  that  this  "  completed  in  a  happy  way  the  reform, 
which  could  not  have  been  accomplished  if  it  had  been  founded  ex- 
clusively on  the  scarcity  of  money." — Le  Probleme  de  V Argent  et 
V  Etalon  d'Or  au  Mexique,  202. 

2  Commission  on  International  Exchange,  1904,  29. 


THE  BANKING  SYSTEM  OF  MEXICO.  49, 

had  fallen  to  $65,613,995,  and  of  this  amount  $15,832,840 
was  in  gold.  By  June,  1906,  total  cash  holdings  had  re- 
covered to  $72,231,513,  and  of  this  amount  $42,381,837  was 
in  gold  and  only  $29,849,676  in  silver.  Exports  of  silver 
from  Mexico  for  the  sixteen  months  ending  with  October, 
1906,  were  $55,608,823,  and  the  coinage  of  gold  was  $51,- 
606, 500. l  The  fear  spread  that  the  country  would  be  de- 
nuded of  the  stock  of  subsidiary  silver  necessary  to  do 
business,  and  in  the  autumn  of  1906  an  export  tax  of  ten 
per  cent,  was  imposed  upon  the  amount  of  silver  coins  sent 
abroad  without  the  importation  of  an  equivalent  amount 
of  gold.2 

Fortunately  the  new  monetary  law,  while  leaving  the  old 
silver  peso  unchanged  at  27.03  grams,  provided  for  sub- 
sidiary silver  coins  both  lighter  in  weight  in  proportion  to 
their  legal  value  (25  grams  to  the  peso)  and  with  a  fineness 
of  eight- tenths  in  pure  silver  instead  of  0.902.*  This  pre- 
cluded the  profit  which  was  found  with  the  old  pesos  in 
exporting  them  for  sale  in  the  I^ondon  silver  market.  The 
policy  pursued  by  the  government,  therefore,  was  to  refrain 
entirely  from  the  coinage  of  pesos  and  to  endeavor  to  fill  the 
channels  of  circulation  with  gold,  bank  paper,  and  sub- 
sidiary silver.  To  this  end,  in  December,  1905,  the  issue 
of  gold  certificates  was  authorized  against  deposits  of  bar 
gold  and  foreign  gold  coin.  Every  effort  was  made  also  to 
increase  the  coinage  of  subsidiary  silver,  until  at  the  end  of 
November,  1907,  the  amount  coined  in  about  two  years  and 
a  half  in  pieces  of  50  centavos  was  $26, 186,619  and  in  smaller 
pieces  $5,499,923.*  It  was  calculated  that  the  total  exporta- 
tion of  Mexican  silver  coin  since  May  i,  1905,  had  reached 
in  October,  1907,  the  sum  of  $85, 956, 202, 5  but  this  had  been 
offset  to  the  amount  of  about  $75,000,000  by  the  coinage 


1  Financial  Documents,  December,  1906,  7. 

2  Bulletin  de  Statistique,  January,  1907,  LXI.,  120. 

3  Decree  of  March  25,    1905,  Bulletin  de  Statistique,  May,   1905, 
LVIL,  560. 

4  Financial  Documents,  December,  1907,  17. 

5  Le  Marche  Financier  en  1907-08,  711. 


496        HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

of  gold,  which  was  finding  its  way  into  general  circulation. 
By  June  30,  1908,  gold  had  become  the  predominant  element 
in  Mexican  bank  reserves  and  silver  had  fallen  to  a  purely 
subordinate  position,  for  of  total  metallic  reserves  of  $76,- 
696,893,  gold  constituted  $52,788,145;  the  old  silver  pesos, 
$I7.763,545;  and  subsidiary  money,  $6,145,203.' 

Under  these  new  conditions  the  banks  and  the  country  at 
large  prospered  greatly.  The  current  of  foreign  capital,  long 
restrained  by  the  uncertainties  of  exchange,  turned  heavily 
in  the  direction  of  Mexico.  Banking  capital  increased  from 
$98,150,000  on  June  30,  1903,  to  $176,100,000  on  June  30, 
1908,  and  the  total  assets  of  the  banks  from  $379,525,207  to 
$756,522,309.  It  was  officially  estimated  at  the  close  of  1906 
that  new  capital  had  entered  the  country  to  the  amount 
of  $86,500,000,  without  taking  account  of  many  small  in- 
dustrial enterprises.2  Railway  earnings  increased  from 
$50,500,000  in  1903  to  nearly  $57,000,000  in  1905. 

If  there  was  anything  to  be  feared  from  this  great  accession 
of  prosperity,  it  was  the  over-expansion  of  credit,  and  against 
this  Minister  L,imantour  put  himself  from  the  first  on  guard. 
The  crash  in  the  United  States  in  the  autumn  of  1907  was 
not  without  its  reaction  upon  Mexico.  As  a  result,  the 
Minister  issued  a  circular  on  February  10,  1908,  in  which  he 
cautioned  the  banks  against  unsound  loans  and  invited 
them  to  a  general  conference  in  April.  Out  of  these  pre- 
cautions grew  the  law  of  June  19,  1908,  which  imposed 
special  restrictions  upon  banks  of  issue  and  upon  other 
banks.  The  period  within  which  new  charters  might  be 
granted  to  banks  of  issue  was  extended  to  March  19,  1922, 
but  no  bank  was  to  be  created  in  future  with  a  capital  of 
less  than  $1,000,000.  The  business  permissible  to  such 
banks  was  more  carefully  defined  than  before,  among  these 
prohibitions  being  a  loan  of  more  than  ten  per  cent,  to  a 
single  person  or  corporation.3 

1  Official  returns  furnished  by  the  Minister  of  Finance. 

2  Financial  Documents,  December,  1906,  10. 

3  Bulletin  of  the  Bureau  of  American  Republics,   August,   1908, 
XXVII.,  386. 


THE  BANKING  SYSTEM  OF  MEXICO.  497 

The  fabric  of  sound  finance  and  public  credit  thus  patiently 
and  skilfully  built  up  under  the  administration  of  President 
Diaz  and  Minister  Limantour  crumbled  into  a  heap  of  ruins 
following  the  abdication  of  President  Diaz  in  the  autumn  of 
1911  and  the  murder  of  his  successor,  Francisco  Madero,  in 
February,  1913.  The  rate  of  exchange  between  Mexico  and 
New  York  fluctuated  violently  as  the  result  of  the  interrup- 
tion of  communications  and  the  absence  of  safe  means  of 
transmitting  currency.  The  value  of  the  peso  at  the  current 
rate  of  exchange  fell  even  below  the  value  of  its  silver 
contents. 

Gold  and  silver  disappeared  from  circulation  in  the  autumn 
of  1913  and  credit  slips  were  issued  by  merchants  in  order 
to  overcome  the  deficiency  in  small  change.  A  decree  was 
issued  by  President  Huerta  on  November  5th  relieving  the 
banks  from  the  obligation  to  pay  gold  or  silver  for  their 
notes,  and  the  Banco  Central  was  greatly  embarrassed  by  the 
presentation  of  the  notes  of  state  banks,  which  it  lacked  the 
facilities  to  send  to  those  banks  for  redemption.  The  Bank 
of  lyondon  and  Mexico  suspended  currency  payments  on  De- 
cember 22d,  but  was  protected  by  the  announcement  of  a 
series  of  bank  holidays,  which  operated  in  effect  as  a  mora- 
torium. Finally,  on  January  7,  1914,  a  decree  was  issued  by 
President  Huerta  making  the  notes  of  all  state  banks  legal 
tender  and  making  their  acceptance  obligatory  in  all  pay- 
ments in  all  parts  of  the  Republic.  Provision  was  made  in 
the  decree  for  the  creation  of  a  guaranty  fund  to  be  sub- 
scribed by  the  banks  and  regulated  by  a  commission.1 
Government  paper  was  issued  in  Northern  Mexico  by  the 
Constitutionalists,  who  finally  entered  the  City  of  Mexico  in 
vSeptember,  1914.  The  entire  currency  situation  was  thus 
left  in  much  confusion,  pending  the  restoration  of  internal 
peace  and  financial  order. 


1  Press  dispatch  iu  New  York  Evening  Post,  January  7,  1914. 


CHAPTER  XVIII. 

BANKING   IN   I.ATIN   AMERICA. 

The  History  of  Brazilian  Paper  Money  and  the  Restoration  of  a  Fixed 
Gold  Exchange— The  Similar  Experience  of  the  Argentine  Re- 
public— Failure  to  Maintain  Gold  Payments  in  Chile — Banking 
Development  in  Paragua}7,  Uruguay,  and  the  Northern  States — 
The  Exchange  Standard  in  Peru— Monetary  Systems  of  Cuba  and 
Panama — Colonial  Banks  of  European  Countries. 

THK  banking  systems  of  the  American  States  and  depen- 
dencies of  the  South  offer  a  great  variety  of  methods 
of  note  issue  and  a  great  variation  in  the  safeguards 
thrown  around  such  issues.  Some  of  the  banking  systems 
of  I^atin  America  have  been  the  development  of  time  and 
experience ;  others  have  been  framed  as  an  entirety  upon 
the  model  of  some  European  S3^stem,  sometimes  with  the 
approval  of  eminent  foreign  economists  ;  and  others  are  sim- 
ply concessions  by  the  governments  to  English  capitalists 
who  conduct  the  affairs  of  the  banks  from  L,ondon.  The 
domestic  systems  of  banking  and  of  currency  have  illus- 
trated in  many  cases  the  fact  that  the  best  regulations  do 
not  always  constitute  a  safeguard  against  unsound  banking 
in  countries  where  internal  development  is  rapid,  specula- 
tion is  intense,  and  the  conservatism  of  fixed  conditions  does 
not  prevail.  Bad  as  have  been  the  results  of  some  of  the 
banking  systems,  their  evils  hardly  kept  pace  for  a  time 
with  the  evils  of  government  paper  currency,  which  proved 
a  serious  fetter  upon  the  prosperity  of  many  South  American 
States.  With  growth  in  population  and  in  the  extraction  of 
national  resources,  however,  there  was  a  great  improvement 
from  about  the  close  of  the  nineteenth  century  in  monetary 

498 


BANKING  IN   LA  TIN  AMERICA.  499 

conditions.  In  Brazil  and  the  Argentine  the  paper  money 
was  gradually  reduced  and  a  system  was  established  based 
upon  the  issue  of  paper  at  a  fixed  rate  in  gold,  which  restored 
to  these  countries  most  of  the  benefits  of  a  gold  standard. 

Banking  relations  between  L,atin  America  and  other  con- 
tinents have  been  chiefly  in  the  hands  of  European  bankers 
and  trade  with  North  America  has  been  carried  on  through 
them.  The  first  International  American  Conference,  held 
in  Washington  in  1889,  recommended  the  creation  of  an  in- 
ternational American  bank  and  several  bills  to  this  end  were 
introduced  in  Congress,  but  up  to  1908  the  project  had  not 
reached  a  more  tangible  stage.  At  the  third  of  these  confer- 
ences, held  in  Rio  de  Janeiro  in  1906,  a  step  was  taken 
towards  closer  co-operation  in  bringing  about  stable  mone- 
tary conditions  by  the  adoption  of  resolutions  recommending 
to  each  government  a  study  of  the  subject,  and  that  these 
studies  be  effected  through  the  International  Bureau  of 
American  Republics  at  Washington,  in  order  that  a  resume 
might  be  distributed  among  the  several  governments  at  least 
six  months  before  the  meeting  of  the  next  conference. ' 

The  Banking  and  Paper  Issues  of  Brazil. 

The  monetary  and  banking  history  of  Brazil  fully  set  forth 
would  contain  much  of  interest  bearing  upon  the  effect  of 
changes  in  the  quantity  of  money  upon  its  value  and  upon 
the  possibility  of  maintaining  comparative  parity  of  foreign 
exchange  without  direct  redemption  of  paper  in  coin.  The 
issue  of  paper  money  dates  back  to  soon  after  the  coming 
to  Brazil  of  the  royal  family,  expelled  from  Portugal  by 
Napoleon  in  1808.  As  early  as  1819,  the  paper  became  re- 
dundant and  the  exchange  value  of  the  milreis,  which  at  par 
was  five  shillings  seven  and  a  half  pence,  fell  to  four  shill- 
ings.a  An  effort  was  made  in  1833  to  restore  fixity  of 
exchange  upon  the  new  basis  of  three  shillings  seven  and 


1  Terceira  Conferencia  International  Americana,  Acta  da  Dedma 
Segunda  Sessas  em  23  de  Agosto,  de  ioo6t  4. 

2  Wileman,  Brazilian  Exchange,  160. 


500         HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

a  half  pence  (about  87  cents)  to  the  milreis.  The  exist- 
ing bank  of  issue  was  liquidated  and  its  note  issue  was 
taken  over  by  the  Treasury.  Another  readjustment  be- 
came necessary  in  1846,  by  which  the  par  of  the  milreis 
was  fixed  at  twenty-seven  pence.  This  remained  the  nomi- 
nal gold  par  during  the  remainder  of  the  century,  although 
the  actual  value  of  the  milreis  went  through  a  great  variety 
of  ups  and  downs. 

Several  circumstances  of  the  Brazilian  paper  circulation 
between  1846  and  1889  gave  some  color  to  the  theory  that 
it  is  possible  to  maintain  an  irredeemable  currency  at  par 
by  regulation  of  the  quantity. 1  Much  was  made  of  the  fact 
that  the  government  was  able  in  1860  to  add  40,000,000 
milreis  to  the  circulation  without  causing  a  permanent  de- 
cline of  exchange  below  par.  There  was  a  depreciation  of 
4.161  per  cent,  in  1860  and  2.619  per  cent,  in  1861,  but 
no  depreciation  in  1863  and  1864.  The  comparative  stability 
of  these  years  was  due  to  the  fact  that  the  new  paper  took 
the  place  of  a  corresponding  amount  of  gold  which  was  ex- 
pelled from  circulation,  while  the  balance  of  payments  was 
influenced  in  favor  of  Brazil  by  foreign  loans  in  1858,  1859, 
and  1860.  Fifteen  years  later,  in  1875,  a  like  phenomenon 
occurred,  on  the  occasion  of  a  foreign  loan  of  ^5, 000,000 
and  unusually  high  prices  for  coffee.  The  effect  of  these 
loans  was  to  offer  a  means  of  adjusting  commercial  and 
financial  balances  abroad  without  drawing  upon  the  gold 
supply  or  compelling  a  readjustment  of  export  prices. a 
While  the  steadiness  of  exchange  in  certain  years  verified 
the  law  that  the  value  of  money  is  influenced  by  the  de- 
mand for  it,  the  fluctuations  in  other  years  indicated  that 

1  Vide  Report  of  the  Indian  Currency  Committee,   1893,  Sec.  92, 
where  the  relative  stability  of  the  Brazilian  exchange  seems  to  be 
rather  overstated.     See  table  in  Wileman,  facing  page  161. 

2  As  Wileman  points  out:  "When  the  currency  is  wholly  incon- 
vertible and  there  is  little  or  no  gold  for  export,  it  is  clear  that  the 
fall  of  exchange  is  not  the  result  of  an  increase  in  the  demand  for 
bullion  alone,  but  of  that  for  exports  of  all  descriptions,  of  which 
bullion  is  merely  the  most  important  and  representative  item." — 
Brazilian  Exchange,  9. 


BANKING  IN    LATIN  AMERICA.  501 

this  law  cannot  be  relied  upon  to  give  adequate  stability 
to  an  irredeemable  currency. 

Whatever  support  might  have  been  drawn  from  the  earlier 
experiences  of  Brazil  as  to  the  stability  of  paper,  the  deluge 
of  new  paper  poured  into  circulation  after  the  fall  of  the 
Empire  in  1889  left  no  room  for  delusions.  The  exchange 
of  that  year  was  favorable.  The  milreis,  which  had  been  at 
a  discount  of  6.48  per  cent,  in  1888,  was  at  par  in  1889,  an(i 
exchange  on  I/ondon  was  at  27  J-  pence.  An  important  factor 
tending  to  stability  was  the  fact  that  the  combined  circulation 
of  paper  and  bank-notes  was  less  in  1889  than  in  any  year 
since  1877  and  there  had  been  no  excessive  issues  since  1869.' 
But  this  favorable  situation  was  radically  changed  by  the 
new  government.  At  the  close  of  1890  the  circulation  had 
been  advanced  to  336,730,462  milreis,  an  increase  of  more 
than  sixty  per  cent.;  the  next  year  513,827,357  milreis  was 
reached;  in  1892,  555*825,964;  in  1893,  646,917,750;  in  1894, 
703,825,960;  and  in  1895,  789,464,096  milreis.  Exchange 
on  lyondon,  which  measured  the  gold  value  of  the  paper 
milreis,  promptly  fell  to  22 1  pence  on  average  for  1890;  i6T5F 
pence  for  1891 ;  10^  pence  for  1894;  and  finally  to  the  low 
level  of  5J  pence  for  1898.  As  in  most  paper  money  de- 
bauches, supply  seemed  never  to  equal  demand,  and  the 
more  the  channels  of  circulation  were  flooded  with  de- 
preciated paper  the  louder  was  the  clamor  that  the  supply 
of  currency  was  insufficient  for  the  needs  of  the  country. 
The  banks,  many  of  which  had  the  privilege  of  note  issue, 
vied  with  the  government  in  the  issue  of  paper  and  in  the 
profitable  speculation  in  exchange,  and,  as  depreciation  more 
than  kept  pace  with  increase  in  quantity,  it  was  a  curious 
fact  that  the  297,800,000  milreis  in  circulation  at  the  close  of 
1890  was  worth  more  in  gold  than  the  788,364,000  milreis 
remaining  in  circulation  in  1898.* 

1  According   to    Wileman    the    average   circulation    in    1869   was 
183,224,767  milreis  ;  1875,  181,868,699  milreis  ;  1880,  215,677,818  mil- 
reis ;  1885,  207,861, 450  milreis  ;  1888,  205, 271, 302  milreis  ;  and  in  1889, 
198,815,562  milreis. 

2  Cf.  Ivyon,  in  Questions  Monetaires  Coniemporaines,  795.    With 


502         HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

It  was  recognized  almost  from  the  first  that  the  debauch 
of  paper  must  come  to  an  end,  but  the  government  had 
entered  upon  a  vicious  circle  which  was  difficult  to  break, 
and  its  attitude  towards  the  banks  and  towards  its  own 
obligations  was  not  such  as  to  restore  confidence.  Two 
banks  were  founded  at  about  the  time  of  the  creation  of 
the  republic,  with  the  support  of  French  capitalists, — the 
National  Bank  of  Brazil  and  the  Bank  of  the  United 
States  of  Brazil.  They  had  been  in  operation  but  a  short 
time  when  a  decree  of  President  Fonseca  in  December, 
1890,  based  upon  a  report  by  Ruy  Barbosa,  the  Minister 
of  Finance,  authorized  the  union  of  the  two  institutions 
under  the  name  of  the  Bank  of  the  Republic  of  the  United 
States  of  Brazil,  with  a  capital  of  200,000,000  milreis.  The 
new  bank  was  authorized  to  issue  notes  to  three  times 
the  amount  of  its  gold  reserve,  and  the  charter  provided 
that  the  government  should  grant  the  right  of  note  issue 
in  future  to  no  new  banks  and  that  the  circulation  of 
existing  banks  should  be  remitted  to  the  new  establish- 
ment as  the  old  ones  surrendered  their  privileges.  The 
existing  banks  of  issue  numbered  six,  with  a  limit  of  cir- 
culation of  166,000,000  milreis.  The  new  bank  undertook 
the  retirement  of  the  government  paper  money,  which  had 
been  in  circulation  for  some  fifteen  years  and  still  amounted 
in  June,  1891,  to  168,000,000  milreis. 

A  new  organization  was  given  to  the  Bank  of  the  United 
States  of  Brazil  by  an  Act  of  December  17,  1892,  under  the 
title  of  the  Bank  of  the  Republic  of  Brazil.  The  capital  was 
reduced  from  190,000,000  milreis  to  150,000,000  milreis,  the 
notes  were  made  legal  tender,  and  the  bank  was  pledged  to 
retire  100,000,000  milreis  in  bills  within  the  year  1893. 1  The 
circulation  of  the  bank,  including  interest-bearing  bonds, 
which  were  made  legal  tender  and  receivable  at  public 
depositaries,  and  including  the  circulation  of  other  bank  bills 
assumed  by  the  consolidated  bank,  reached  379,390,720  mil- 


exchange  at  23^  in  1890,  the  gold  value  of  the  currency  worked  out 
at  £28,073,000 ;  at  5^  in  1898,  it  worked  out  at  £23,537,000. 
1  Revue  des  Banques,  January,  1893,  XII.,  293. 


BANKING  IN    LA  TIN  AMERICA.  503 

reis  ($205,000,000)  and  the  government  paper  money  reached 
200,000,000  milreis  ($  109,000, ooo).1  This  was  the  situation 
early  in  1893,  but  the  suspension  of  specie  payments  as  the 
result  of  a  new  civil  war  led  to  repeated  new  issues  of  paper 
money  and  a  constantly  growing  premium  on  gold.  The 
pledge  to  retire  paper  money  and  bank-notes  in  1893  was 
partially  kept,  only  to  be  followed  by  new  issues  larger  than 
those  withdrawn. 

The  difficulties  of  the  government  constantly  grew  worse, 
because  it  had  not  only  sanctioned  extravagance  at  home, 
but  had  a  large  gold  debt  abroad,  upon  which  the  charges 
steadily  mounted  in  currency  when  converted  into  gold  at 
current  rates  of  exchange.  Annual  interest  charges  of  about 
^4,000,000  when  converted  at  parity  in  1889  called  for 
SS.SSS*000  milreis;  when  converted  at  5}  pence  in  1898  they 
called  for  165,300,000  milreis. a  Even  at  home  prices  of 
everything  bought  by  the  government  were  rising,  and  for 
the  enormous  deficits  of  the  budget  there  was  no  remedy  but 
drastic  increase  of  taxation,  national  bankruptcy,  or  a  radical 
change  of  policy.  The  latter  alternative  was  finally  adopted 
in  1898,  with  the  negotiation  of  the  Funding  Loan  with  the 
Rothschilds  of  London.  Under  this  contract  the  federal 
government  was  allowed  to  suspend  for  three  years,  until 
June  30,  1901,  payment  of  interest  on  the  foreign  debt,  and 
on  the  interior  gold  loan  of  1879,  and  the  gold  railway 
guarantees.  The  holders  of  the  coupons  of  these  obligations 
received  gold  funding  bonds  bearing  interest  at  five  per 
cent.,  which  might  be  issued  to  an  aggregate  amount  of 
£i 0,000, ooo.  These  bonds  were  secured  by  the  customs 
revenues  of  Rio  de  Janeiro.  The  government  agreed  to  de- 
posit in  the  three  banks  of  Rio  paper  money  to  the  amount  of 
new  securities  issued,  at  the  rate  of  18  pence  to  the  milreis, 
which  was  to  be  retired  from  circulation  and  destroyed  or  to 
be  employed  in  buying  drafts  on  London  in  favor  of  the 
Rothschilds,  to  constitute  a  fund  for  resuming  payment  of 
interest  on  the  debt.  At  the  same  time  the  National  Bank 


1  Levy,  282-84. 

9  Lyoii,  Questions  Monetaires  Contemporaines,  799. 


504         HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

was  again  reorganized,1  and  provision  was  made  for  accumu- 
lation of  a  gold  fund  in  London.8 

These  measures,  courageously  adhered  to  by  the  Brazilian 
Government,  soon  began  to  bear  fruit.  The  year  1899  wit- 
nessed the  withdrawal  of  52,214,605  milreis  of  depreciated 
paper  and  the  year  1900,  34,095,434  milreis.  The  with- 
drawals were  not  so  large  in  succeeding  years,  but  the  out- 
standing circulation  was  reduced  on  March  31,  1908,  to 
610,816,013  milreis,3  within  sight  of  the  goal  of  600,000,000 
milreis  fixed  by  the  government.  The  exchange  value  of 
the  paper  mounted  upward,  slowly  at  first,  until  it  attained 
9^  pence  in  June,  1905.  Then,  under  the  influence  of  other 
reformatory  measures  contemplated  by  the  government,  it 
suddenly  advanced  in  July  to  13  pence  and  in  August  to  nearly 
17  pence.  These  sudden  advances  were  disturbing  to  the 
financial  markets,  and  after  a  sharp  reaction  the  rate  settled 
between  12  and  15  pence,  which  came  to  be  treated  as  ap- 
proximating the  rate  at  which  resumption  of  specie  payments 
would  eventually  be  accomplished. 

The  value  of  the  paper  money,  having  once  entered  firmly 
upon  the  upward  course,  had  advanced  so  rapidly  that  it 
was  impossible  for  prices  to  adjust  themselves  to  the  changes. 
Before  the  close  of  August,  1905,  when  the  value  of  the 
milreis  had  touched  17  pence,  there  was  general  complaint 
that  prices  were  no  lower  in  paper  than  when  exchange  was 
at  twelve  pence  or  even  at  eight  pence.4  It  was  evident  that 
conditions  were  ripe  for  further  steps.  The  issue  of  gold 
notes  at  a  fixed  rate,  as  in  the  Argentine,  began  to  be  dis- 
cussed by  the  financial  journals.  To  accomplish  this  upon 
a  sound  basis  the  government  determined  to  again  revise  the 
statutes  of  the  national  bank,  now  known  as  the  Bank  of  the 
Republic.  For  the  first  time  since  1900  a  general  meeting  of 


1  Ivy  on,  801. 

*  Economiste  Europten,  March  n,  1898,  XIII.,  319. 

3  Presidential  message,  in  Moniteur  des  Int£r£ts  Matiriels,  June 
24,  1908,  2075. 

4  Economiste  Europeen,  August  25,  1905,  XXVIII.,  228. 


BANKING  IN  LATIN  AMERICA.  505 

the  shareholders  was  held  on  July  29,  1905,  and  a  committee 
was  authorized  to  confer  with  the  government. l 

The  reorganization  of  the  bank  changed  the  name  to  the 
Bank  of  Brazil  and  fixed  the  capital  at  70,000,000  milreis,  of 
which  22,250,000  went  to  the  old  shareholders,  22,250,000  to 
the  government,  and  25,500,000  milreis  were  offered  for  public 
subscription.8  The  bank  was  given  authority  to  issue  checks 
payable  in  gold,  receivable  for  customs,  and  was  made  the 
depository  of  the  funds  of  the  Treasury.  Senor  Bulhoes, 
the  Minister  of  Finance,  declared  that  the  time  had  come  for 
the  intervention  of  the  government  in  the  market  for  foreign 
exchange,  where  gold  had  ceased  to  be  a  standard  of  value 
and  had  become  a  plaything  of  speculation.3  Already  on 
March  31,  1906,  the  government  had  to  its  credit  with  the 
Rothschilds  in  London  ,£6,469,966,  and  it  was  estimated 
that  a  large  credit  balance  had  been  created  in  favor  of  Brazil 
by  the  importation  of  foreign  capital.4 

The  important  step  was  now  taken  of  creating  a  gold  con- 
version office  (Caixa  de  Comersao],  which  offered  to  deliver 
paper  for  gold  at  the  fixed  rate  of  15  pence  (30  cents)  per 
milreis.  Fears  were  entertained  that  gold  would  not  be 
presented  and  that  the  new  notes,  if  issued,  would  not  find 
their  way  into  general  circulation.  Only  the  latter  of  these 
doubts  was  partially  verified.  The  banks  put  the  gold  notes 
into  their  reserves  and  paid  out  the  old  notes,  but  the  latter 
remained  all  through  the  year  1907  substantially  at  gold  par. 
The  Conversion  Office  was  opened  on  December  26,  1906,  and 
on  December  31,  1907,  had  issued  notes  to  the  amount  of 
113,730,423  milreis  and  paid  out  gold  for  notes  to  the  amount 
of  13,688,655  milreis,  leaving  a  balance  outstanding  of 
100,041,748  milreis  ($30, 000,000). 5  The  Bank  of  Brazil  in 

1  Economiste  Europeen,  September  8,  1905,  XXVIII.,  317. 

2  Economise  Europeen,  October  6,  1905,  XXVIII.,  445. 

3  Le  Marchb  Financier  en  1905-06,  769. 

4The  amount  of  foreign  capital  introduced  in  the  three  years  ending 
with  1904  was  estimated  at  ^"7,600,000  and  the  net  balance  created  by 
exportations  and  otherwise  at  ^25,312,139. — Economiste  Europeen, 
January  12,  1906,  XXIX.,  37. 

5  Moniteur  des  Interets  Materiels,  June  24,  1908,  2075. 


506         HIST  OR  Y  OF  MODERN  BANKS  OF  ISSUE. 

October,  1907,  began  buying  bills  for  future  delivery,  against 
which  gold  was  imported.  Net  gold  imports  for  the  year 
ending  October  31,  1907,  were  ^28,571,950.'  So  vigorous 
was  the  policy  of  the  Bank  of  Brazil  that  complaints  were 
heard  from  foreign  bankers  operating  in  the  country  that  the 
old  profits  on  exchange  had  disappeared  and  that  the  govern- 
ment bank  conducted  its  operations  not  with  a  view  to  profit, 
but  entirely  as  a  protection  to  the  interests  of  the  Conversion 
Office.2  That  it  at  least  accomplished  its  object  was  shown 
by  the  fact  that  during  1907  exchange  showed  a  maximum 
variation  of  \\  pence,  or  about  2.7  per  cent.,  while  in 
1905  the  range  of  variation  had  been  4J|  pence,  and  in  1906 
3^  pence,  or  more  than  twenty  per  cent. 

The  law  of  1906,  establishing  the  Conversion  Office,  pro- 
vided that  the  issue  of  gold  notes  should  cease  when  the 
amount  reached  320,000,000  milreis,  corresponding  to  de- 
posits of  ^"20,000,000,  and  that  a  higher  rate  of  exchange 
for  the  milreis  might  then  be  fixed.  The  notes  might  then 
be  called  in  and  new  ones  issued  at  the  changed  rate. "  As 
prices  and  wages  become  adjusted  to  a  fixed  exchange,  how- 
ever, it  does  not  seem  likely  that  an  arbitrary  variation  in 
the  value  of  the  milreis  will  be  found  advisable.  In  the 
meantime  the  Brazilian  Government  arranged  for  a  coinage 
of  subsidiary  silver  at  the  rate  of  ten  grams  to  the  milreis,  or 
near  the  rate  of  24  to  i. 

Banking  in  Argentina. 

The  forced  legal  tender  of  paper  currency  is  declared  by 
M.  Levy  to  have  been,  "  since  1826,  a  chronic  malady,  with 
rare  intermissions,  in  the  Argentine  Republic."  *  The  his- 

1  U.  S.  Consular  Reports,  Feb.  25,  1908. 

s  London  Economist,  January  18,  1908,  LXVI.,  126.  It  was  ad- 
mitted, however,  by  the  Chairman  of  the  London  and  Brazilian  Bank, 
at  their  annual  meeting  in  London  April  28,  1908,  that  if  the  bank 
"  were  losers  in  one  way  by  the  privileges  enjoyed  by  their  native 
competitor,  they  were  always  gainers  by  a  steady  exchange." — 
Economist,  May  2,  1908,  LXVI.,  948. 

3  Arts.  3  and  4,  Monite ur  des  InterSts  Materiels,  Sept.  23,  1906,  3133. 

4  Melanges  Financiers,  286. 


BANKING  IN  LATIN  AMERICA.  507 

tory  of  the  country  for  the  years  prior  to  the  crisis  of  1890  was 
the  story  of  unduly  expanded  credit,  discounting  too  rapidly 
the  possibilities  of  the  future,  which  was  witnessed  in  the 
United  States  in  1837  and  1857  and  more  recently  in  Aus- 
tralia. The  oldest  bank  of  the  Argentine  Republic  was  the 
Bank  of  the  Province  of  Buenos  Ayres,  which  was  founded 
as  a  private  bank  in  1822,  but  was  purchased  by  the  State  in 
1826  from  the  proceeds  of  an  English  loan.  It  was  authorized 
as  a  state  bank  to  issue  circulating  notes  redeemable  in  silver. 
The  issues  were  excessive  and  had  depreciated  in  1868  to  a 
value  of  four  cents  on  the  dollar.  The  bank  was  then  au- 
thorized to  convert  the  notes  into  a  new  issue  and  continued 
in  operation  until  1891.  The  Bank  of  the  Nation  (Banco  de 
la  Naciori)  was  created  by  the  Act  of  November  5,  1872,  limit- 
ing the  circulation  to  double  the  paid-up  capital  and  requir- 
ing a  cash  reserve  of  at  least  one-fourth  of  the  outstanding 
notes.  The  government  subscribed  for  $2,000,000  of  the 
capital  stock,  which  was  fixed  at  £5,000,000*'  The  bank 
was  given  continuance  for  twenty  years  and  its  notes  were 
legal  tender. 

The  banking  system  which  was  established  in  1887,  and 
which  broke  down  so  completely  in  1890,  was  peculiar  in  the 
fact  that  the  circulating  notes  purported  to  combine  the 
double  guarantee  of  metallic  coverture,  so  dear  to  the  fram- 
ers  of  the  English  Act  of  1844,  and  the  coverture  by  means 
of  evidences  of  the  public  debt,  which  is  the  basis  of  the 
national  banking  system  of  the  United  States.  But  the 
gold  was  borrowed,  the  issue  of  evidences  of  the  public  debt 
went  beyond  legitimate  currency  requirements  and  the  guar- 
antees proved  of  no  avail  against  inflation,  depreciation,  and 
resulting  insolvency.  The  Bank  of  the  Nation  was  reor- 
ganized under  the  Guaranteed  Banking  Act  of  November 
3,  1887.  .  This  Act  authorized  the  issue  of  notes  by  any 
provincial  bank  which  complied  with  the  requirement  of  a 
deposit  of  government  bonds.  A  special  issue  of  four  and  a 
half  per  cent,  gold  bonds  was  authorized  by  the  general 


1  The  Argentine  monetary  unit  was  the  peso  ($.965). 


508          HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

government  as  the  basis  of  this  circulation,  and  in  order  to 
secure  the  gold  required  to  buy  these  bonds  each  of  the 
provinces  desiring  a  provincial  bank  sold  abroad  a  special 
issue  of  its  own  gold  bonds.  The  gold  received  was  paid 
into  the  national  Treasury  for  the  national  bonds  and  the 
banks  of  the  provinces  were  authorized  to  issue  an  amount 
of  paper  money  equal  to  the  bonds  thus  purchased.  The 
provinces  became  responsible  for  the  issue  of  paper  money 
by  the  respective  provincial  banks.1  A  considerable  sum  of 
gold  was  obtained  by  the  sale  of  bonds,  which  resulted  in  a 
great  inflation  of  the  prices  of  property  on  which  loans  were 
made  by  the  banks. 

Bad  banking  and  excessive  issues  wrecked  the  new  sys- 
tem within  four  years,  and  sent  gold  to  300  per  cent,  in 
paper,  in  spite  of  the  security  of  the  note  issues.  Every 
bank  of  issue  suspended  in  1891  and  is  still  in  process  of 
liquidation.  The  guaranteed  bonds  issued  to  found  the  sys- 
tem were  estimated  to  be  outstanding  in  1893  to  the  amount 
of  $100,082, 965.'  The  inflation  had  been  aided  by  the  issue 
of  paper  money  without  special  guarantee,  but  it  was  the 
opinion  of  the  executive  power  that  the  Guaranteed  Bank- 
ing Act  was  the  cause  of  the  crisis.3  The  government  as- 
sumed responsibility  for  the  outstanding  paper  and  required 
the  surrender  of  the  bonds  and  specie  held  by  the  banks.  It 
was  necessary  to  have  some  banking  institution  to  permit 
the  continuance  of  government  finance,  and  the  Bank  of  the 
Argentine  Nation  was  erected  in  December,  1891,  upon  the 
ruins  of  the  old  Bank  of  the  Nation  and  of  the  provincial 
banks.  The  bank  was  opened  with  a  capital  of  $50,000,000, 
entirely  paid  in  paper.  The  affairs  of  the  old  national  bank 
were  made  over  to  the  new  bank  and  its  shareholders  given 
a  preference  in  the  subscriptions  to  the  new  stock.  The  bank 
was  allowed  to  issue  notes  to  the  amount  of  seventy-five  per 
cent,  of  the  internal  bonds  deposited  as  a  guarantee.4  The 


1  Comptroller's  Report,  1895,  Letter  of  Minister  William  I.  Bucha- 
nan, 596. 

2  London  Bankers'  Magazine,  March,  1893,  LV.,  408-16. 

3  L<§vy,  286. 

4  London  Bankers'  Magazine,  June,  1892,  III.,  905. 


RANKING  IN  LATIN  AMERICA.  509 

attempt  to  sell  stock  to  the  public  proved  a  failure  and  the 
capital  of  the  bank  was  furnished  exclusively  by  the  Treasury. 

Relief  from  a  part  of  the  burden  of  the  external  debt  and  a 
rectification  of  the  budget  were  necessary  to  extricate  the 
country  from  its  difficulties.  The  first  arrangement  for  these 
purposes,  made  under  a  law  of  January  23,  1891,  providing 
for  a  loan  in  London  of  ^15,000,000  at  six  per  cent.,  proved 
too  burdensome,  and  was  superseded  by  a  new  project  in 
1893.  Under  this  plan  the  Argentine  Government  was  per- 
mitted to  reduce  its  interest  payments  for  five  years  to  seventy 
per  cent,  of  the  amounts  stipulated,  but  was  to  make  up  the 
amount  at  a  later  date.1  Promises  were  again  made  that 
expenses  should  be  curtailed  and  every  effort  put  forth  to 
restore  order  to  the  public  finances.  The  result  of  these 
measures  and  a  large  export  movement  of  cereals  was  to 
reduce  the  quotation  for  gold  from  278  in  August,  1898,  to 
206  in  December  of  the  same  year.  While  the  change  was 
acceptable  to  the  government,  to  importers,  and  to  those  who 
had  invested  foreign  capital  in  the  country,  it  called  forth 
loud  protests  from  agriculturists  and  exporters.  Even  the 
Minister  of  Finance  was  forced  to  admit  in  his  report  for 
April,  1900,  that  "  the  study  of  the  conversions  operated  in 
other  countries  had  persuaded  him  of  the  truth  of  the  prin- 
ciple, that  if  the  money  of  a  given  country  had  suffered  a 
great  depreciation,  which  had  long  been  maintained,  in 
such  manner  that  the  economic  conditions  of  the  country 
had  been  radically  transformed,  it  was  impossible  to  return 
to  the  old  par  of  exchange."  3 

It  was  felt  that  the  time  had  arrived,  however,  when  the 
government  was  strong  enough  to  establish  a  stable  ex- 
change. There  had  been  no  additions  to  the  paper  issues 
since  1893,  an^  tne  amount  outstanding  was  about  $296, 690,- 
ooo,  which  at  the  value  of  gold  at  the  time  of  issue  repre- 
sented $i56,452,ooo.3  Two  important  laws  were  accordingly 
passed  in  November,  1899 — the  first  providing  for  the  crea- 

1  I/yon,  in  Questions  Monetaires  Contemporaines,  810. 

8  Lyon,  811. 

3  Economiste  Europten,  November  10,  1899,  XVI.,  580. 


510         HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

tion  of  a  conversion  fund  for  the  exchange  of  notes  for  gold, 
the  second  placing  certain  resources  at  the  command  of  the 
Bank  of  the  Nation  to  aid  in  carrying  out  the  reform.1  It 
was  declared  flatly  in  the  first  of  these  laws  that ' '  the  nation 
will  convert  the  total  amount  of  bills  in  circulation  into  gold 
at  the  rate  of  forty-four  gold  centavos  to  the  paper  peso." 
The  executive  was  authorized  to  give  three  months'  notice  of 
the  date  and  manner  of  the  conversion.  The  conversion 
fund  was  to  be  constituted  from  five  per  cent,  of  the  ad- 
ditional duties  on  imports ;  the  profits  of  the  Bank  of  the 
Nation ;  the  produce  of  the  sale  of  the  Andine  and  Toma 
Railways,  and  some  other  special  funds. 

The  Bank  of  the  Nation  was  made  the  depository  of  all 
these  funds  as  they  became  available  and  was  to  employ 
them  only  in  exchange  operations.  It  was  also  to  receive 
deposits  of  gold  at  the  legal  rate  and  to  issue  certificates 
therefor  redeemable  in  gold.  Public  dues  might  be  paid  in- 
differently in  gold  or  paper  at  the  legal  rate.  The  govern- 
ment took  off  the  hands  of  the  Bank  of  the  Nation  $15,873,700 
in  bonds  of  the  interior  loan  of  1891  at  the  rate  of  75  per 
cent,  of  par.  President  Rocca,  in  his  message  to  Congress 
in  May,  1900,  was  able  to  announce  that  the  conversion  fund 
had  already  reached  $3,200,000,  that  exchange  had  become 
practically  fixed,  and  that  the  adoption  of  the  rate  of  44 
centavos  on  the  eve  of  a  large  crop  had  protected  the  farming 
and  grazing  interests  from  a  heavy  loss  which  they  would 
have  suffered  if  exchange  had  continued  to  appreciate.  He 
announced  at  the  same  time  that  $139,260,366  in  gold,  repre- 
senting the  obligations  of  the  guaranteed  banks  assumed  by 
the  government,  had  been  destroyed  within  the  year  as 
having  no  further  value.3 

From  the  opening  of  the  Conversion  Office,  there  was  found 
no  difficulty  in  maintaining  fixity  of  exchange.  Gold  was 
imported  almost  regularly  from  England,  in  order  to  enlarge 
the  circulation  of  gold  notes,  to  pay  for  large  exports  of  wool 
and  other  Argentine  products.  Already  in  the  summer  of 

1  jfrconomiste  Europeen,  December  8,  1899,  XVI.,  709. 

2  Ibid.,  June  29,  1900,  XVII.,  829. 


BANKING  IN  LA  TIN  AMERICA.  5  1 1 

1906  the  country  was  so  well  supplied  with  gold  that  the 
question  was  being  discussed  whether  further  credits  in 
London  might  not  well  be  kept  there  as  an  exchange  fund 
instead  of  shipped  in  metal  to  Buenos- Aires.1  President 
Alcosta,  in  his  annual  message  of  May  n,  1908,  announced 
that  on  December  31,  1907,  the  amount  of  gold  in  the  Con- 
version Office  was  $129,530,000  and  the  funds  in  the  custody 
of  the  bank  were  $22,000,000,  making  together  an  amount 
equivalent  to  ^30,308,000.  Outstanding  against  this  were 
paper  issues  of  the  face  value  of  $587,666,000,  or  about 
^51,714,000;  so  that  the  metallic  reserve  was  fifty-nine  per 
cent,  of  the  notes.  In  spite  of  the  stress  in  Europe  and 
America,  the  banks  of  Buenos-Aires  had  been  able  to  in- 
crease their  deposits  within  the  year  from  $754,000,000  to 
$783,000,000  and  their  cash  reserves  from  $257,000,000  to 
$3 1 1,  coo,  ooo. a 

Such  was  the  expansion  of  business  under  the  influence  of 
stable  exchange  that  foreign  capital  showed  a  disposition  to 
enter  the  country  in  large  amounts.  In  Southeastern  Amer- 
ica it  was  estimated  that  ^65,000,000  of  German  capital  was 
invested  at  the  end  of  1904,  and  nearly  every  foreign  bank, 
of  which  there  were  British,  German,  Spanish,  and  Italian, 
increased  its  capital  within  a  few  years.3  Seventeen  of  these 
institutions  were  in  operation  in  1908.  So  potent  was  their 
influence  in  the  money  market  that  the  Bank  of  the  Nation 
felt  compelled  to  ask  an  increase  of  its  capital  to  $100,000,000, 
in  order  to  increase  its  branches  and  to  have  sufficient  re- 
sources to  regulate  the  money  market  by  rediscounting  for 
the  private  banks.4  The  authority  was  granted  and  the  new 
capital  was  raised  on  behalf  of  the  nation  by  the  sale  of 
obligations  of  the  National  Hypothecary  Bank  and  the 
issue  of  internal  bonds.5  The  bank  had  104  branches  at 
the  close  of  1907,  and  its  accounts  in  paper  (in  addition  to 


1  Vide  London  Statist,  Sept.  22,  1906,  LVIII.,  486. 

2  Moniteur  des  Interns  Materiels,  May  17,  1908,  1634. 

3  London  Financial  News,  December  27,  1905. 

4  London  Economist,  April  6,  1907,  LXIV.,  583. 
6  Ibid.,  October  12,  1907,  LXV.,  1728. 


512 


HISTORY  OF  MODERN  BANKS  OF  ISSUE. 


small  amounts  in  gold)  showed  the  following  progression  l  : 
Accounts  of  the  Bank  of  the  Argentine  Nation. 


DEC.  31. 


DISCOUNTS  AND 
ADVANCES. 


1892 
1896 

1900 

1905 
1907 

136,125,700 
55,800,900 
75,426,700 
145,909,900 

162,276,600 

$  32,468,900 
66,380,800 
83,065,900 
161,522,700 

214,022,200 

$16,888,000 

36,805,000 

44,190,900 
51,257,000 
55,057,400 

The  Banks  of  Chile. 

Chile  has  been  in  recent  years  under  the  domination  of 
government  paper  money  and  legal  tender  bank-notes,  in 
spite  of  the  comparative  wealth  and  prosperity  of  the  republic 
among  other  South  American  countries.  Free  banking 
existed  in  Chile  up  to  1839,  when  a  law  was  passed  forbidding 
the  creation  of  banks  of  issue  without  the  authority  of  the 
governor  of  the  municipality  or  department  where  they  were 
established.  A  general  reform  of  the  banking  system  was 
made  by  the  law  of  July  23,  1860,  under  the  inspiration  of 
M.  Courcelle-Seneuil.2  This  law  limited  the  maximum  cir- 
culation to  one  and  one-half  times  the  capital  of  the  banks 
and  provided  that  the  notes  should  be  redeemable  in  specie, 
and  in  case  of  default  should  constitute  a  judgment  (titres 
extcutoires)  against  the  goods  and  persons  of  the  proprietors. 
The  issue  of  the  notes  was  placed  under  the  supervision  of 
the  public  authorities  by  requiring  the  signature  and  seal  of 
the  superintendent  of  the  mint.  Shareholders  were  liable 
only  for  the  amount  of  their  shares,  loans  to  officers  and 
directors  were  required  to  be  specially  recorded,  and  the 
books  and  cash  were  to  be  open  to  government  inspection.3 
These  regulations  are  still  in  force,  but  the  readjustment  of 
the  monetary  standard  has  led  to  some  recent  changes  in  the 
provisions  governing  the  circulation. 

1  Bulletin  of  the  Bureau  of  American  Republics,  March,  1908, 
XXVI.,  514- 

*  Levy,  291. 

3  Comptroller's  Report,  '805,  Letter  of  Minister  Edward  H.  Stro- 
bel,  68. 


BANKING  IN  LATIN  AMERICA.  513 

The  suspension  of  specie  payments  in  Chile  was  decreed 
in  1865,  but  was  brought  to  an  end  on  August  31,  1866. 
The  specie  basis  was  again  abandoned  and  forced  legal  tender 
decreed  by  a  law  of  July  25,  1878,  which  fixed  the  maximum 
circulation  at  15,000,000  piasters  ($13,600,000),  divided 
among  eleven  banks  which  subscribed  to  a  new  loan.  The 
government  resorted  to  legal-tender  paper,  issued  directly  by 
the  Treasury,  during  the  war  with  Peru,  and  the  amount 
had  risen,  on  January  5,  1881,  to  40,000,000  piasters.  The 
banks,  at  the  outbreak  of  the  revolution  against  President 
Balmaceda  in  1891,  had  a  circulation  of  about  15,000,000 
piasters,  upon  a  capital  of  30,000,000  piasters  and  a  reserve 
of  6,000,000.  The  circulation  increased  after  the  fall  of 
Balmaceda  to  20,000,000  piasters,  and  the  government  paper 
money  increased  to  42,000,000  piasters.  The  Junta  estab- 
lished at  Iquique  during  the  civil  war  proclaimed  liberty  of 
note  issues,  and  the  Bank  of  Tarapaca,  the  railway  companies, 
the  municipality  of  Iquique,  the  principal  corporations  and 
business  houses,  and  even  retail  tradesmen,  issued  their  own 
notes.  The  notes  were  not  legal  tender  and  the  public  ac- 
cepted those  they  regarded  as  good  and  rejected  those  they 
regarded  as  bad,  but  the  return  of  civil  order  was  followed 
by  the  redemption  of  the  paper  in  nearly  ever}''  case.  The 
government  made  an  unsuccessful  effort  to  restore  specie 
payments  in  1892,  by  means  of  a  bond  issue  and  an  adjust- 
ment of  the  standard  to  meet  the  depreciation  of  the  paper 
money.  The  paper  continued  at  a  heavy  discount  and  a 
new  law  was  pushed  through  Congress  early  in  1895,  still 
further  reducing  the  standard.  The  "dollar"  was  made 
the  monetary  unit,  but  was  reduced  to  one-thirteenth  part 
of  a  pound  sterling  or  about  36.49  cents  in  United  States 
gold  coin.  Gold  was  made  the  monetary  standard  and  was 
to  be  paid  out  for  paper,  beginning  June  i,  1895.  Resump- 
tion was  began  under  these  requirements,  but  the  exchanges 
proved  unfavorable  and  gold  was  largely  exported. 

The  law  of  1895  Put  a  limit  of  24,060,000  dollars  ($9,000,- 
ooo)  upon  bank-note  issues  until  December  31,  1897,  appor- 
tioned to  the  paid-up  capital  of  the  banks,  and  provided  that 


514         HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

the  notes  should  be  guaranteed  to  their  full  amount  by 
deposits  in  the  public  treasury  of  gold,  government  notes, 
municipal  bonds,  treasury  bills,  or  bonds  of  mortgage  banks. 
These  notes  were  made  receivable  in  payment  of  taxes  until 
December  31,  1897.  The  notes  constituted  a  first  lien  on 
the  assets  and  in  case  of  failure  the  securities  in  the  Treasury 
were  to  be  sold  for  the  benefit  of  the  note- holders.1 

The  bank  currency  system  and  the  gold  standard  were 
wrecked  completely  in  1898  by  the  threat  of  war  with  the 
Argentine  Republic.  The  causes  of  the  crash  lay  deeper,  in 
the  lack  of  adaptability  of  the  means  adopted  for  maintaining 
stable  exchange  and  in  the  bond-secured  note  system,  but  it 
was  the  rumors  of  war  and  other  disturbances  which  caused 
the  tottering  structure  to  fall.  The  President  of  the  Republic, 
in  his  annual  message  of  June  i,  1898,  had  vaunted  the  ex- 
istence of  a  gold  fund  sufficient  to  cover  a  paper  issue  of  57,- 
000,000  piasters  and  had  even  promised  to  present  a  bill  for 
the  employment  of  the  surplus  of  the  conversion  fund.2  On 
July  5th  the  growing  exports  of  gold  and  the  refusal  of  the 
Bank  of  Chile  to  honor  gold  drafts  caused  a  run  upon  the 
banks  at  Santiago  for  the  withdrawal  of  deposits,  which 
compelled  general  suspension  of  gold  payments.  A  mora- 
torium of  thirty  days  was  granted  by  the  government  and 
a  bill  was  quickly  put  through  Congress  (on  July  3oth) 
restoring  the  regime  of  irredeemable  paper. 

The  amount  of  paper  authorized  was  50,000,000  piasters 
($18,000,000),  and  it  was  solemnly  voted  that  the  notes 
should  be  redeemed  at  the  rate  of  eighteen  pence  at  the 
end  of  three  years.  The  notes  were  to  be  legal  tender, 
but  were  to  be  deposited  with  the  banks,  which  had  seen 
practically  their  entire  circulation  melt  away  in  the  demand 
for  its  reimbursement.3  Customs  duties  were  to  be  paid  in 
gold  or  gold  exchange.  The  curious  policy  was  adopted  of 
selling  for  paper  the  gold  thus  received,  which  had  the  effect 

1  Bulletin   of  the  Bureau  of  American    Republics,  April,    1895, 
670-74. 

2  Economise  Europeen,  September  30,  1898,  XIV.,  421. 

3  Marche  Financier  en  1898-99,  695. 


BACKING  JN  LATIN  AMEKICA.  515 

of  carrying  the  gold  premium  to  45  per  cent,  by  August  i5th. 
The  paper  fever  once  in  the  blood,  the  monetary  history  of 
Chile  for  the  next  ten  years  was  a  record  of  constant  new  in- 
fusions of  the  drug  as  the  effect  of  the  earlier  ones  became 
deadened.  The  first  issue  of  50,000,000  piasters  was  sup- 
plemented in  1905  by  a  further  issue  of  30,000,000  piasters  ; 
in  the  spring  of  1906  by  an  issue  of  40,000,000  piasters '  ; 
and  by  a  law  of  September  12,  1907,  by  a  still  further  issue 
of  30,000,000  piasters,  which  carried  total  issues  to  150,- 
000,000. 2  Ultimate  conversion  into  gold  was  appropriately 
postponed,  by  the  law  of  December  29,  1904,  to  the  begin- 
ning of  the  year  igio.3 

During  all  these  vicissitudes  the  government  struggled  to 
accumulate  gold  funds  with  a  view  to  ultimate  resumption, 
and  for  several  years  prior  to  the  crisis  of  1907  exchange 
was  kept  within  comparatively  narrow  limits  of  fluctuation. 
In  1904  the  maximum  was  17  pence  and  the  minimum  16 ; 
in  1905,  the  maximum  was  15}  and  the  year  closed  with 
a  rate  of  14}  pence.  The  year  1906,  the  earthquake  year, 
saw  the  minimum  below  14  pence,  and  the  crisis  of  1907  car- 
ried quotations  down  sharply,  from  12  \  pence  on  October  ist 
to  8J  pence  on  December  3d.4  Even  at  this  time,  however, 
government  four  and  a  half  per  cent,  bonds,  on  which  the 
interest  was  payable  abroad  in  gold,  receded  only  from  92 
in  September  to  87  in  December,  and  the  government  did 
not  abandon  its  purpose  to  accumulate  sufficient  gold  to  re- 
store the  notes  to  their  legal  parity  of  18  pence.  The  law 
of  September  12,  1907,  authorized  a  gold  loan  of  ^4, 500,000, 
and  it  was  calculated  that  the  Treasury  already  had  gold 
funds  in  the  custody  of  European  banks  and  at  home  to  the 
amount  of  78,420, 160  piasters  at  the  legal  parity.6  The  limit 
of  paper  issues  was  officially  fixed  at  150,000,000  pesos,  and 
by  a  law  of  December  9,  1907,  provision  was  made  for  a  sub- 


1  Report  of  the  Director  of  the  Mint,  roo?,  222. 

2  Marche  Financier  en  1007-08,  732. 

3  £conomiste  Europeen,  August  25,  1905,  XXVIII.,  253. 

4  London  Economist,  December  14,  1907,  L,XV.,  2172. 
6  Marche  Financier  en  1907-08,  733. 


516      HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

sidiary  silver  coinage.  The  system  of  Brazil  and  the  Argen- 
tine was  adopted,  of  issuing  paper  upon  deposits  of  gold  at 
the  legal  rate  of  18  pence. 

Chile  did  not  fail  to  make  considerable  economic  progress 
in  spite  of  the  regime  of  paper  money.  The  incidents  of 
this  progress,  however,  were  such  as  usually  mark  a  period 
of  inflation  and  over-speculation.  During  the  six  years  end- 
ing with  1906,  joint-stock  companies  were  organized  to  the 
number  of  438,  with  subscribed  capital  of  151,949,296  pias- 
ters, and  of  these  more  than  84  per  cent,  were  organized  in 
the  last  three  years  of  the  period.1  The  banks,  deprived  of 
their  circulation  by  the  flood  of  government  paper,  neverthe- 
less showed  assets  on  December  31,  1907,  amounting  to 
811,363,263  piasters.  Capital  amounted  to  124,040,525  and 
deposits  to  415,205,924  piasters.2 

Banking  in   Uruguay. 

Uruguay  has  remained  for  many  years  upon  the  gold 
basis,  with  the  peso  as  the  unit,  worth  $1.034  in  United 
States  gold.  An  old  issue  of  government  paper  money  was 
withdrawn  in  1892,  and  the  country  was  for  a  time  under 
the  regime  of  free  banking.  Neither  this  system  nor  the 
various  efforts  to  establish  government  banks  were  entirely 
successful  down  to  the  latter  part  of  the  nineteenth  century, 
but  conditions  during  the  past  decade  have  been  more 
favorable. 

The  law  of  March  23,  1865,  prescribed  uniform  rules  for 
the  government  of  banks  of  issue.  One  of  these  rules  fixed 
the  circulation  at  three  times  the  capital,  but  this  was  re- 
stricted in  1870  to  twice  the  capital  actually  paid  up.3  The 
private  banks  in  1893  renounced  the  right  of  circulation,  and 
it  was  decided  to  authorize  no  additional  banks  of  issue. 
This  decision  was  due  to  the  failure  of  the  National  Bank, 
which  went  out  of  active  existence  in  1893.  It  was  soon 

1  Report  of  A.  A.  Winslow,   U.  S.   Consular  Reports,  October  n, 
1907,  17. 

2  Bulletin  of  the  Comptroller  of  the  Currency,  June  22,  1908,  10. 

3  Levy,  281. 


BANKING  IN  LATIN  AMERICA.  517 

felt,  however,  that  a  central  bank  was  a  necessary  adjunct 
of  a  sound  monetary  system,  and  the  Bank  of  the  Republic, 
with  a  capital  of  $10,000,000,  was  constituted  in  1896  from 
the  proceeds  of  a  loan  in  London.  The  new  institution 
was  authorized  to  issue  gold  notes  to  double  the  amount 
of  its  capital,  in  denominations  of  $10  and  upwards,  and 
notes  to  the  amount  of  half  its  capital  payable  in  gold  or 
silver  at  the  option  of  the  bank,  in  denominations  below 
$10.'  The  two  institutions  which  had  survived  the  troubles 
of  1893  and  J894  were  the  London  and  River  Plate  Bank  and 
the  Italian  Bank  of  the  River  Plate.  The  English  bank 
was  ordered  in  the  autumn  of  1896  to  withdraw  its  note  issues 
in  six  months,  in  order  to  leave  the  field  clear  to  the  Bank  of 
the  Republic.  The  circulation  of  the  bank  at  the  time  was 
about  $3,000,000  and  of  the  Italian  bank  about  $850,000.' 

The  authority  to  issue  notes  payable  in  silver  was  the 
cause  of  some  disturbance  of  confidence  in  1898.  The  dif- 
ficulty was  due  largely,  however,  to  the  over-issue  of  sub- 
sidiary coins  by  the  government  in  order  to  profit  by  the 
seigniorage.  The  bank  had  in  circulation  on  August  31, 
1898,  small  notes  to  the  amount  of  $i,704,i39.3  It  was 
demanded  by  the  Chamber  of  Commerce  of  Montevideo  that 
the  proportion  be  reduced,  and  a  run  was  made  upon  the 
bank  on  September  6th  for  the  redemption  of  the  notes.  It 
was  shown  by  experience,  however,  that  the  notes  were 
preferred  to  coin  and  that  the  real  cause  of  the  trouble  lay 
elsewhere  than  with  the  bank.4  The  gold  standard  has  since 


1  Economist*  Europken,  December  19,  1896,  X.,  800. 

2  New  York  Bankers'  Magazine,  February,  1897,  UV.,  216.     The 
London  and  River  Plate  Bank  did  business  in  other  countries  and  in 
the  troubles  of  1894  carried  cash  to  the  large  amount  of  ,£6,037,411, 
which  was  a  more  effective  resource,  in  the  opinion  of  the  chairman 
of  the  board  of  directors,  than  any  form  of  securities,  and  had  much 
to  do  with  enabling  the  bank  to  weather  the  storm  of  the  crisis  in 
Argentina,  Uruguay,  and  Paraguay,  which  swept  away  so  many  other 
banking  institutions. — London   Bankers'  Magazine^  January,    1895, 
LIX.,  98. 

3  Economiste  Europten,  November  4,  1898,  XIV.,  581. 

4  Ibid.,  November  23,  1898,  XIV.,  677. 


518         HISTORY  OF  MODERN  BANKS  OP  ISSUE. 

been  maintained  and  the  Bank  of  the  Republic  had  shown  a 
favorable  balance  sheet.  The  government  was  able  to  set 
aside  $1,000,000  from  surplus  receipts  in  1907  for  the  purpose 
of  increasing  the  capital  of  the  bank  and  permitting  expan- 
sion of  the  note  issue.  Profits  for  the  year  were  $728,242, 
of  which  the  government  as  sole  owner  received  eighty  per 
cent.,  or  $592,594.  This  was  more  than  sufficient  to  pay  the 
interest  on  the  English  loan,  which  was  $470,000. '  The 
circulation  of  the  Bank  of  the  Republic  at  the  close  of  1906 
was  $8,331,340  in  gold  and  $2,598,937  in  silver.  The  cir- 
culation of  the  Italian  Bank  was  $3,309,280." 

Banking  in  Paraguay. 

Banking  in  Paraguay  has  been  in^a  somewhat  chaotic  state 
since  the  collapse  of  credit  in  the  Argentine  Republic,  of 
which  the  country  is  a  near  neighbor.  The  circulation  was 
issued  for  many  years  by  the  National  Bank  of  Paraguay, 
in  which  the  government  was  a  large  shareholder.  The 
gold  unit  of  value,  prior  to  the  suspension  of  specie  pay- 
ments, was  the  English  pound  sterling,  and  five  paper 
dollars  were  paid  for  £i  in  gold.  The  suspension  of  the 
National  Bank  of  the  Argentine  Republic  on  January  i, 
1885,  was  not  followed  at  once  by  suspension  in  Paraguay, 
but  later  in  the  year  gold  went  to  a  premium  of  fifty  per 
cent.  The  National  Bank  had  the  option  of  redeeming  in 
gold  or  silver,  and  redeemed  in  silver  until  1889,  when  the 
Bank  of  Paraguay  and  the  River  Plate  was  founded,  redeem- 
ing its  notes  exclusively  in  silver.  Both  banks  were  sub- 
jected to  a  severe  run  in  1890,  their  silver  reserves  were 
reduced,  and  gold  went  to  300  per  cent,  in  paper.  The 
National  Bank  suspended  the  payment  of  its  obligations 
and  announced  that  it  would  be  compelled  to  grant  an  ex- 
tension to  its  customers,  many  of  whom  were  land  owners  of 
large  means,  but  unable  to  meet  their  immediate  obligations. 


1  Bulletin  of  the   Bureau  of   American    Republics,  July,    1908, 
XXVII.,  214. 

2  Report  of  the  Director  of  the  Mint,  foo?,  268. 


BANKING  IN  LATIN  AMERICA.  519 

The  bank  was  granted  by  law  a  ten  years'  extension  of  time 
within  which  to  collect  its  credits  and  settle  its  debts,  and 
debtors  were  expected  to  pay  their  indebtedness  in  quarterly 
instalments  during  the  ten  years.  The  money  had  originally 
been  borrowed  upon  a  specie  basis,  but  was  to  be  paid  back 
in  paper.  Even  these  payments  were  not  made,  and  in 
August,  1894,  the  bank  agreed  to  accept  fifty  per  cent,  of  the 
amounts  due.  Many  debtors  paid  under  this  condition,  but 
the  demand  for  money  drove  up  the  interest  rates  so  sharply 
that  others  were  prevented  from  making  payment  within 
the  three  months  allowed. l  The  affairs  of  the  bank  were  put 
in  process  of  liquidation  through  a  syndicate. 

The  Bank  of  Paraguay  and  the  River  Plate  (Banco  Para- 
guay y  de  la  Plata)  was  founded  with  a  capital  of  $8,000,000 
in  Paraguayan  money,  worth  at  the  time  of  its  foundation 
in  1889  about  66f  cents  to  the  dollar  in  gold,  but  now 
worth  about  ten  cents.  The  government  subscribed  one- 
quarter  of  the  capital  through  a  bond  for  ^"400,000  nego- 
tiated at  six  per  cent.,  and  receives  five  per  cent,  of  the 
profits  of  the  Bank  of  Paraguajr  in  compensation  for  the 
privileges  of  the  charter.  Exchange  fluctuated  violently 
during  the  revolution  of  1904,  the  rate  for  $100  in  gold  ad- 
vancing from  $875  in  paper  at  the  beginning  of  the  y  ear  to 
$1400  on  November  iyth,  three  months  after  the  outbreak 
of  the  revolution.  Two  days  after  the  ratification  of  peace 
(December  8,  1904)  the  rate  dropped  to  1040. 2 

An  effort  was  made  in  1907  to  restore  sound  conditions  by 
the  creation  of  a  new  state  bank  with  an  authorized  capital 
of  $20,000,000  gold,  of  which  $6,000,000  was  to  be  issued  at 
once,  one-third  being  subscribed  by  the  government.  The 
bank  was  accorded  by  the  law  of  December  24,  1907,  most 
of  the  privileges  of  a  central  bank  of  issue.  The  note  issue 
was  required  to  be  covered  by  gold  to  the  amount  of  one- 
third.  The  rate  of  conversion  for  the  paper,  which  amounted 

1  Letter  of  Vice-Consul   Ebeii    M.    Flagg,    Comptroller's  Report, 
1895,  92. 

2  Report  of  U.  S.  Vice-Consul  de  Korab,  Consular  Reports,  June  13, 
I9°5,  IS- 


520         HISTORY   OF  MODERN  BANKS  OF  ISSUE. 

nominally  to  about  $35,000,000,  was  fixed  at  ten  per  cent,  of 
the  legal  parity.  The  bank  was  required  to  redeem  in  gold 
amounts  up  to  $100  gold,  but  for  larger  amounts  might  issue 
sight  drafts  on  exchange  funds  abroad.1  It  was  calculated 
that  the  entire  burden  of  the  depreciated  paper  could  be 
gotten  rid  of  in  eight  or  ten  years.  The  duration  of  the 
privilege  of  the  bank  was  fixed  at  fifty  years.  It  was  re- 
quired to  pay  ten  per  cent,  of  its  profits  to  the  government, 
and  this  income  and  that  from  the  export  duty  on  hides  were 
to  be  set  aside  for  retiring  the  government  paper  money.3 

The  Monetary  System  of  Peru. 

Peru,  after  passing  through  various  vicissitudes  with  gov- 
ernment notes  and  bank  paper,  converted  outstanding  paper 
issues  in  1887  into  funded  debt  and  has  since  authorized  no 
banks  of  issue  and  has  had  only  metallic  money  in  circulation.3 
Her  monetary  history  in  recent  years  is  interesting,  how- 
ever, because  she  was  among  the  pioneers  in  putting  in 
effect  a  currency  system  which  frankly  recognized  the  de- 
preciation of  silver  and  conformed  in  some  respects  to  the 
gold-exchange  standard.  The  coinage  of  gold  was  sus- 
pended December  30,  1872,  and  the  country  was  for  a 
quarter  of  a  century  on  the  silver  standard.  The  disturb- 
ing effects  of  the  fall  in  silver  led  to  the  closing  of  the  mints 
to  free  coinage  by  a  law  of  April  9,  1897,  and  preparations 
to  return  to  the  gold  standard. 

The  new  standard  created  a  unit  known  as  the  libra, 
corresponding  in  weight  and  value  to  the  English  pound 
sterling.  The  sole,  the  old  silver  unit,  was  to  be  made 
worth  24  pence,  or  one-tenth  part  of  the  libra.  The  excess 
of  soles  was  reduced  by  converting  2,000,000  of  them  into 

1  London  Economist,  April  n,  1908,  LXVL,  780. 

2  London  Bankers'  Magazine,  March,  1908,  LXXXV.,  442. 

3  Report  of  the  Director  of  the  United  States  Mint,  zooo,  431.     All 
the  reports  here  quoted  in  regard  to  Peru  were  made  by  Irving  B. 
Dudley,  United  States  Minister  to  Peru,  and  are  among  the  most  in- 
telligent and  comprehensive  made  to  the  Department  of  State  for  the 
use  of  the  Mint. 


BANKING  IN  LATIN  AMERICA.  $21 

bar  silver  and  selling  it  at  a  favorable  moment  for  gold. 
The  banks  agreed  to  exchange  gold  and  silver  coins  at  par, 
and  during  the  year  1900  exchange  on  I,ondon  advanced 
gradually  to  24^  pence  and  closed  at  24!  pence.1  The 
sole,  although  containing  twenty-five  grams  of  silver,  nine- 
tenths  fine,  like  the  French  5-franc  piece,  was  rated  under 
the  new  system  at  only  about  half  its  original  gold  value,  or 
at  the  ratio  to  gold  of  about  31  to  i.  This  led  to  some  diffi- 
culties when  silver  bullion  rose  in  1906  to  33  pence  per  ounce. 
At  this  rate,  even  with  allowance  for  the  usual  costs  of  ex- 
port, there  was  a  profit  of  about  four  and  a  half  per  cent,  in 
exporting  the  silver  coins. 

The  silver  coins  began  to  disappear  and  for  a  few  days  in 
the  commercial  centres  were  parted  with  only  at  a  premium. 
The  banks  discouraged  such  discrimination  by  paying  out 
silver  freely  and  the  government  adopted  several  transitory 
measures  as  a  prelude  to  more  serious  ones  if  the  rise  in 
silver  should  not  be  checked.  The  export  of  silver  coins 
was  prohibited,  their  melting  into  bullion  was  forbidden, 
and  provision  was  made  for  a  gold  coin  of  one-fifth  of  a  libra. 
The  reduction  of  the  weight  and  fineness  of  the  sole  was 
under  consideration,  but  was  rendered  unnecessary  by  the 
reaction  in  the  price  of  silver  bullion  which  soon  set  in.8 
The  shrinkage  in  the  silver  circulation  was  compensated  by 
a  special  coinage  of  1,500,000  soles  ($750,000).  Gold  is 
brought  regularly  to  the  mint  for  coinage,  and  exchange 
rates  on  Europe  and  the  United  States  move  within  narrow 
limits,  determined  by  the  demand  and  supply  of  bills.3 

The  Banks  of  the  Northern  States. 

Banking  in  Venezuela  is  governed  by  the  law  of  May  7, 
1895,  which  permits  the  creation  of  banks  of  issue  under 
fixed  conditions.  The  notes  are  not  legal  tender  and  can  be 
issued  to  the  amount  of  no  more  than  fifty  per  cent,  of  the 


1  Report  of  the  Director  of  the  Mint,  igoi^  344. 

2  Ibid.,  1006,  239. 

3  Ibid.,  1907,  256. 


522          HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

paid-up  capital.  The  banks  are  required  to  redeem  then 
notes  in  lawful  money  on  demand,  at  the  central  office  and 
the  branches.  Twenty -five  per  cent,  of  the  capital  of  a  pro- 
posed new  bank  is  required  to  be  held  as  a  cash  reserve.  The 
banks  of  issue  are  forbidden  to  loan  on  their  own  shares  or 
to  make  loans  which  will  lock  up  their  capital  for  over  six 
months.  Balance  sheets  must  be  published  quarterly,  show- 
ing, among  other  things,  the  loans  to  directors  and  officers, 
and  changes  in  the  by-laws  must  be  promptly  communicated 
to  the  government.  The  national  executive  is  empowered 
to  appoint  an  inspector  for  each  bank  with  power  to  exam- 
ine books  and  cash.1 

The  government  in  1896  ceased  the  issue  of  paper  money 
and  the  premium  on  gold  is  small.2  There  are  three  banks 
of  issue — The  Bank  of  Venezuela,  with  a  capital  of  12,000,- 
ooo  bolivars  ($2, 400,000),  and  circulation  on  June  30,  1907, 
of  1,976,550  bolivars  ;  the  Bank  of  Caracas,  with  a  capital 
of  6,000,000  and  circulation  of  786,208  bolivars;  and  the 
Bank  of  Maracaibo,  with  a  capital  of  1,250,000  and  circu- 
lation of  1,430,370  bolivars.3 

In  Colombia  there  are  several  banks  of  issue,  but  their 
notes  have  played  but  a  small  part  in  the  circulation  because 
of  the  excessive  issues  of  government  paper.  These  issues 
are  estimated  at  10,000,000,000  pesos,  but  their  depreciation 
was  such  that  the  value  of  the  paper  peso  was  finally  fixed 
officially  at  one  centavo,  or  one  per  cent,  of  original  nominal 
value.4  Within  a  few  years  efforts  have  been  made  to  restore 
a  stable  metallic  standard  By  decree  of  March  6,  1905, 
the  Central  Bank  was  established,  with  a  capital  of  $8,000,- 
ooo.  The  bank  is  authorized  to  issue  notes  to  double  the 
amount  of  its  capital,  and  must  hold  against  them  a  re- 
serve in  gold  or  legal  Colombian  coin  in  the  proportion  of 
thirty  per  cent.  The  government  has  consecrated  certain 


1  Gaceta  Official,  May  10,  1895,  Ley  de  Bancos. 

2  Muhleman,  159. 

3  Statesman**  Year  Book,  1008,  1634. 

4  Report  of  the  Director  of  the  Mint,  1907,  223. 


BANKING  IN  LATIN  AMERICA.  523 

revenues  to  the  restoration  of  a  metallic  basis  and  by  a  law 
of  June  12,  1907,  provided  for  a  new  gold  unit  equal  to  the 
fifth  part  of  the  pound  sterling.  A  new  bank  of  issue  was 
authorized  in  1907  at  Cartagena,  to  be  known  as  the  Banco 
de  Bolivar,  with  a  capital  of  $500,000  and  authority  to  issue 
notes  to  the  amount  of  $1,000,000.  * 

The  secession  of  Panama  from  Colombia  in  1904  left  the 
new  state  to  devise  her  own  monetary  system  and  banking 
laws.  The  serious  task  assumed  by  the  United  States  in  the 
construction  of  the  Panama  Canal  made  it  of  interest  to  that 
country  that  a  sound  currency  system  should  be  in  operation 
in  the  Canal  Zone,  and  it  was  proposed  by  the  American 
Secretary  of  War  that  the  money  of  Panama  should  be  used 
if  the  system  of  the  new  republic  should  be  put  on  a  stable 
basis.  This  was  agreed  upon  at  several  conferences  held  at  the 
War  Department  in  Washington  between  representatives  of 
the  United  States  and  of  the  Government  of  Panama,  in  June, 
1904,  and  the  measure  there  outlined  was  perfected  and 
enacted  by  the  Panama  Government  on  June  28,  1904. 2  By 
this  agreement  the  gold  currency  of  the  United  States  was 
made  legal  tender  in  Panama  and  the  money  of  Panama  was 
made  legal  tender  in  the  Canal  Zone,  under  the  authority 
of  the  United  States. 

The  silver  unit  adopted  by  Panama  was  the  balboa  of  25 
grams  (about  385.8  grains),  nine-tenths  fine,  and  its  value 
was  fixed  at  fifty  cents  in  American  gold.  This  value  was 
to  be  maintained  by  limiting  the  quantity  of  coins  and  pro- 
viding an  exchange  fund  in  New  York,  as  under  the 
Philippine  system.  The  amount  of  new  coin  was  fixed 
provisionally  at  $1,500,000  (gold  value),  with  authority  for 
an  additional  issue  up  to  $1,500,000,  if  found  necessary  by 
the  Canal  Commission.  Provision  was  made  for  calling  in 


1  Bulletin  of  Ike  Bureau  of  American  Republics,  October,  1907, 
XXV.,  855. 

2  The  documentary  history  of  these  transactions  is  contained  in  the 
Report  of  the  Commission  on  International  Exchange^  1904,  313-33. 
The  present  writer  represented  the  Commission,  by  invitation  of  the 
Secretary  of  War. 


524         HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

old  Colombian  silver  coins  and  for  the  co-operation  of  the 
two  governments  by  the  sale  of  drafts  at  reasonable  rates  in 
order  to  maintain  parity.1  Banking  was  done,  prior  to  the 
American  occupation,  by  the  larger  commercial  houses,  but 
a  branch  of  the  International  Banking  Corporation  of  New 
York  was  established  in  1904,  and  such  branches  existed  in 
1908  at  Colon,  Panama,  and  Empire. 

Ecuador  has  two  banks  of  issue — the  Bank  of  Ecuador 
and  the  Bank  of  Commerce  and  Agriculture.  The  capital 
of  the  Bank  of  Ecuador,  which  was  established  in  1867  at 
Guayaquil,  has  been  increased  from  time  to  time,  until  in 
1907  it  was  3,000,000  sucres  ($1,500,000).  The  other  in- 
stitution has  a  capital  of  5,000,000  sucres  ($2,500,000).  The 
banking  law  requires  reserves  to  be  kept  to  the  amount  of 
one-third  of  the  circulation,  at  least  one-half  of  such  reserves 
to  be  in  gold.  In  fact,  practically  the  whole  of  the  reserve 
is  now  kept  in  gold,  the  amount  of  gold  held  against  out- 
standing notes  at  the  close  of  1906  having  been  4,198,611 
sucres  and  the  note  circulation  8,043,454  sucres.3 

The  monetary  system  of  Ecuador  is  substantially  the  same 
as  that  of  Peru — a  gold  standard,  with  a  coin  known  as  the 
condor  as  the  unit,  of  the  same  value  as  the  English  pound 
sterling,  and  with  a  large  use  of  silver  coins  issued  at  near 
the  ratio  of  31  to  i.  The  silver  unit,  known  as  the  sucre, 
from  a  former  President  of  the  Republic,  is  of  the  weight 
of  the  French  5-franc  piece  (25  grams),  but  is  worth  in  gold 
only  one-tenth  of  the  pound  sterling  ($0.486).  The  law 
establishing  this  system  was  enacted  in  1898  and  took  effect 
in  1900.  Full  provision  was  made  for  the  exchange  and 
exportation  of  surplus  silver  of  old  types  and  of  foreign 
coins.3  Bank-notes  convertible  into  gold  form  the  bulk  of 
the  actual  circulation. 


1  Aii  agreement  to   prevent  excessive  charges  for  exchange  was 
made  between  the  Canal  Commission  and  the  local  bankers,  April  29, 
I9°5- — Hearings  before  the  Finance  Committee  of  the  United  States 
Senate,  36. 

2  Statesman's  Year  Book,  7908,  910. 

3  Report  of  the  Director  of  the  Mint,  1900,  332. 


BANKING  LV  LATIN  AMERICA.  $2$ 

Bolivia  has  five  banks  of  issue  and  branches  of  several 
foreign  exchange  banks.  The  country  is  on  the  silver  basis, 
the  unit  being  the  boliviano,  which  is  the  equivalent  of  the 
five-franc  piece  in  size,  but  fluctuates  with  the  value  of  silver 
bullion.1  A  law  of  September  14,  1906,  provides  for  a  gold 
standard  with  a  unit  called  the  peso,  equal  to  one-fifth  of 
the  pound  sterling.  The  legal-tender  power  of  silver  will 
be  limited  to  ten  pesos.  The  banks  now  redeem  their  notes 
in  silver.  The  National  Bank,  located  at  Sucre,  has  a  capital 
of  5, 000,000  bolivianos  and  a  circulation  of  about  4,200,000 
bolivianos.  The  Banco  Francisco  Argandona,  founded  in 
1893,  nad  a  capital  in  1906  of  2,500,000  bolivianos  and  cir- 
culation of  about  3,500,000  bolivianos.  The  Industrial  Bank 
has  a  capital  of  2,500,000  and  circulation  of  1,700,000  bolivi- 
anos. The  Agricultural  Bank  has  a  capital  of  1,700,000  and 
the  Mercantile  Bank  a  capital  of  800,000  bolivianos.3 

Banking  in  Cuba  and  Porto  Rico. 

The  Spanish  Bank  of  Cuba  long  provided  the  circulation 
for  that  island.  The  bank  was  seriously  crippled  by  the 
policy  of  the  Spanish  Government  during  the  insurrections, 
in  compelling  the  bank  to  issue  notes  for  the  benefit  of  the 
state.  These  notes  were  not  redeemable,  and  after  the 
American  occupation  passed  out  of  circulation.  So  disturb- 
ing was  the  effect  upon  public  confidence  that  no  bank- 
notes are  now  issued  in  Cuba,  although  the  new  National 
Bank  of  Cuba  has  the  power  of  issue  under  its  charter.  The 
Spanish  Bank,  with  an  original  capital  of  8,000,000  piasters 
($7,400,000),  has  withdrawn  its  branches  from  the  provinces 
and  does  business  only  in  Havana.  The  National  Bank, 
while  not  clothed  with  monopoly  powers,  has  fourteen 
branches  and  does  a  large  share  of  the  business  with  the 
United  States.  It  was  organized  in  1901,  and  in  1908  had  a 
capital  of  $5,000,000  in  United  States  currency  and  deposits 


1  Muhleman,  157. 

8  Bulletin  oj  the  Bureau  of  American  Republics,  XXV.,  808. 


526         HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

of  about  $14, 000,000. l  The  Bank  of  Havana  has  a  capital 
of  $2,500,000,  and  there  are  branches  of  two  Canadian  banks 
in  the  island. 

The  monetary  system  of  Cuba  is  peculiar  in  that  the 
commercial  community  has  adhered  to  the  Spanish  gold 
standard,  while  small  transactions  are  carried  on  in  Spanish 
silver  at  its  current  exchange  value.  When  Spain  went 
upon  the  paper  basis  the  Cuban  bankers  and  merchants 
refused  to  follow.  An  adequate  supply  of  gold  was  kept 
in  Cuba  by  the  curious  device  of  rating  Spanish  gold  coins 
at  the  custom-house  and  in  financial  transactions  at  about 
six  per  cent,  above  their  actual  value  at  the  old  legal  parity 
with  silver — that  is,  five  pesetas  in  gold,  originally  equivalent 
to  one  peso,  were  rated  at  about  $1.06.  The  fact  that  this 
arbitrary  enhancement  of  valuation  would  be  lost  by  ex- 
portation tended  to  keep  the  gold  coins  in  the  island.  The 
silver  coins  in  use,  however,  were  those  of  Spain,  instead 
of  having  a  distinctive  character  as  in  Porto  Rico  and  the 
Philippines.  They  fluctuated  substantially  with  the  course 
of  Spanish  paper,  which,  after  the  war  with  the  United 
States  was  over,  was  above  the  bullion  value  of  the  coins. 
As  Spanish  exchange  improved  in  1905  and  1906,  there  was 
a  tendency  to  export  the  silver  coins  to  Spain,  which  for  a 
time  threatened  to  almost  denude  the  island  of  its  subsidiary 
currency.8  United  States  currency  has  come  into  use  in 
Santiago  and  to  some  extent  in  other  parts  of  the  island. 

Porto  Rico  under  Spanish  authority  possessed  a  bank  of 
issue,  known  as  the  Spanish  Bank  of  Porto  Rico,  founded  in 
1891,  with  a  circulation  of  about  1,500,000  piasters.  Its 
charter  was  similar  in  its  provisions  to  that  of  the  Bank 

1  Vide  article  by  the  President  of  the  bank,  Edmund  G.  Vaughn, 
in  New  York  Commercial,  January  7,  1908. 

2  Cf.  Pepper,  Report  on   Trade  Conditions  in  Cuba,  igo6,  32-34. 
The  present  writer,  in  the  spring  of  1907,  suggested  the  adoption  in 
Cuba  of  a  local  silver  currency  kept  at  gold  par  and  the  exportation 
of  the  Spanish  silver  by  exchange  operations  at  the  profit  of  the 
Cuban  Treasury,  but  the  Provisional  Governor,  in  an  elaborate  letter 
to  the  War  Department   in  August,   1907,  refused  to   approve  the 
suggestion. 


BANKING  IN  LATIN  AMERICA.  527 

of  Spain  and  allowed  the  issue  of  notes  to  three  times  the 
amount  of  the  capital.  This  privilege  was  not  impaired 
when  the  Congress  of  the  United  States  authorized  the  bank 
to  change  its  name  to  Bank  of  Porto  Rico  and  convert  its 
capital  into  United  States  currency,  which  was  made  the 
currency  of  the  islands. '  The  capital  of  the  bank  was  then 
fixed  at  $750,000,  and  the  actual  circulation  does  not  exceed 
this  amount.  The  assets  of  the  bank  on  June  30,  1907,  were 
$2,671,327,  but  were  exceeded  by  those  of  the  Colonial  Bank 
of  Porto  Rico,  which  were  $3,831,582.'  The  total  resources 
of  all  Porto  Rican  banks  in  1908  were  $10,417,624,  of  which 
$5,940,587  was  due  depositors. 

Banking  in  Central  America. 

Costa  Rica  had  from  1884  to  1902  only  one  bank  of  issue, 
founded  as  the  Bank  of  the  Union.  Under  a  contract  made 
by  the  government  in  1884,  the  bank  changed  its  name  to 
Bank  of  Costa  Rica,  and  was  given  the  right  to  issue  notes 
to  double  the  amount  of  its  capital  against  a  coin  reserve  of 
twenty-five  per  cent.  The  contract  did  not  specify  whether 
the  reserve  should  be  of  gold  or  silver,  but  the  bank,  by 
paying  silver  and  making  no  effort  to  sustain  exchange, 
permitted  the  monetary  system  to  descend  gradually  to  the 
silver  basis.  The  government  took  measures  in  1896  to  re- 
turn to  the  gold  basis,  and  finally  in  1900  persuaded  the 
bank,  which  had  so  grossly  abused  its  trust,  to  renounce 
its  monopoly  of  note  issue.8  The  country  now  has  three 
banks  of  issue, — the  Bank  of  Costa  Rica,  with  a  capital  of 
2,000,000  colons  ($900,000)  ;  the  Anglo-Costa  Rican  Bank, 
1,200,000  colons  ;  and  the  Commercial  Bank  of  Costa  Rica, 
1,000,000  colons.  These  banks  are  required  to  hold  a  re- 
serve equal  to  fifty  per  cent,  of  circulation.  The  notes 
outstanding  on  March  31,  1907,  were  for  the  Bank  of  Costa 
Rica,  1,994,000  colons ;  the  Anglo-Costa  Rican  Bank,  1,200,- 
ooo  colons;  and  the  Commercial  Bank,  1,000,000  colon,0 

1  Public  Resolution  No.  32,  approved  June  6,  1900. 

3  Report  of  the  Comptroller  of  the  Currency,  1907,  420. 

3  Le  Marche  Financier  en  JTOOZ-OJ,  984. 


528         HISTORY  OF  MODERN  BANKS^  OF  ISSUE. 

The  metallic  circulation  of  the  country  consisted  chiefly  of 
gold  after  the  adoption  of  the  gold  standard  in  1896,  and 
more  than  one  quarter  in  United  States  gold  coin.1 

Semi-annual  reports  are  required  of  banks  of  issue  in 
Guatemala  and  the  government  designates  experts  to  make 
periodical  examinations  of  their  books.2  A  cash  reserve  of 
fifty  to  sixty  per  cent,  was  required  to  be  held  against  notes, 
but  this  requirement  was  generally  ignored  and  the  circu- 
lating medium  came  to  consist  entirely  of  bank  paper  and 
nickel  coins.  The  issue  of  uncovered  notes  was  further 
dealt  with  by  a  decree  of  June  25,  1903,  which  required 
that  future  issues  should  be  covered  by  gold  and  silver  in 
the  proportion  of  ten  per  cent,  for  the  first  year;  twenty 
per  cent,  for  the  second  year  ;  and  thirty  per  cent,  for  the 
third  year.3  Even  this  law  has  not  been  fully  carried  out 
and  the  value  of  the  paper  peso  has  fallen  to  about  ten  per 
cent,  of  its  old  legal  value.  The  estimated  amount  of  such 
paper  at  the  close  of  1906  was  43,908,000  pesos,  of  which 
the  gold  value  was  about  $4,4OO,ooo.4  The  number  of  banks 
issuing  notes  is  six, — the  International  Bank,  the  Columbian 
Bank,  the  Commercial  Bank,  the  Bank  of  Guatemala,  the 
Bank  of  the  Occident,  and  the  American  Bank. 

The  monetary  system  of  Nicaragua  zs  governed  by  the  law 
of  March  20,  1912,  establishing  the  gold  standard,  with  a 
unit  known  as  the  "  cordoba,"  of  the  exact  weight  and  value 
of  the  American  gold  dollar.  The  actual  circulation  con- 
sists of  the  notes  of  the  National  Bank  of  Nicaragua  and  of 
silver  coins,  both  of  which  are  kept  at  par  with  gold  by  the 
maintenance  of  a  reserve  fund  of  forty  per  cent,  in  New  York. 
The  country  was  from  1893  to  1912  under  the  regime  of 
government  paper,  which  declined  from  a  value  of  about 
fifty  cents  in  1893  to  five  or  six  cents  in  191  i.s  The  rate  of 


1  Statesman's  Year  Book,  1908,  883. 

9  Report  of  the  Comptroller  of  the  Currency,  1805,  85. 

^Statesman's  Year  Book,  1008,  1144. 

4  Report  of  the  Director  of  the  Mint,  1907,  239. 

s  Vide  Plan  of  Monetary  Reform  for  Nicaragua,  submitted  to  Messrs. 
Brown  Brothers  &  Co.  and  Messrs.  J.  &  W.  Seligman  &  Co.,  by  F.  C. 
Harrison  and  Charles  A.  Conant,  April  23,  1912. 


BANKING  IN  LA  TIN  AMERICA. 


529 


conversion  fixed  by  the  bank  and  the  government  under  au- 
thority of  the  law  of  1912  was  twelve  and  a  half  cordobas  to 
one  peso,  which  was  made  effective  in  March,  1913.  The 
circulation  of  the  National  Bank  of  Nicaragua  on  May  31, 
1914,  was  about  1,800,000  cordobas. 

The  Republic  of  Salvador  contains  three  banks  of  issue, 
with  special  charters  granted  by  the  government,  under  the 
provisions  of  a  general  law.  The  banks  are  allowed  to  issue 
notes  to  the  amount  of  twice  their  subscribed  capital,  but  are 
required  to  hold  forty  per  cent,  of  the  amount  of  the  circula- 
tion in  silver  coin.  The  outstanding  issues  are  about  4,000,- 
ooo  pesos  and  cash  resources  are  1,600,000  pesos  in  silver. x 

Honduras  has  a  single  bank  of  issue, — the  Bank  of  Hon- 
duras. The  country  is  on  the  silver  basis,  and  the  bank 
notes  are  redeemed  in  silver  pesos.  The  amount  in  circula- 
tion at  the  close  of  1906  was  $537,715." 

Haiti  and  Santo  Domingo. 

"  The  exclusive  privilege  of  issuing  bills  to  bearer,  payable 
in  specie  on  presentation,"  was  conferred  on  the  National 
Bank  of  Haiti  by  the  decree  of  the  National  Assembly  of 
April  i,  1880.  The  Bank  was  founded  by  French  capital- 
ists, with  a  capital  of  10,000,000  francs  ($2,000,000),  and  its 
privileges  were  conferred  for  fifty  years.  The  charter  re- 
quired the  coin  reserve  to  equal  at  least  one-third  of  the 
circulation  and  made  the  notes  legal  tender  throughout  the 
republic.  The  founders  of  the  bank  secured  from  the  gov- 
ernment a  pledge  to  adopt  a  national  currency  and  this  was 
done  by  making  the  gourde  the  unit  (equal  to  five  French 
francs)  and  providing  for  gold  and  silver  coinage  at  the  Paris 
mint.  The  government  went  further  and  violated  the  privi- 
leges of  the  bank  by  issuing  a  national  paper  currency, 
amounting  to  1,000,000  gourdes  in  1884,  and  eventually  to 
6,200,000  gourdes.3  The  amount  has  been  somewhat  re- 
duced, but  has  in  the  meantime  deranged  the  financial  sys- 

1  Muhleman,  160. 

2  Report  of  the  Director  of  the  Mint,  1007,  242. 

3  Comptroller's  Report,  1895,  Letter  of  Minister  John  B.  Ferris,  86. 


530         HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

tern  and  substantially  deprived  the  bank  of  the  power  of 
issuing  its  own  notes.  The  bank  was  required  by  a  law  of 
September  29,  1892,  to  issue  notes  of  one  and  two  gourdes 
on  account  of  the  government.1 

An  effort,  made  in  1895,  to  establish  the  gold  standard, 
proved  abortive,  but  for  several  years  prior  to  1907  the  gov- 
ernment succeeded  in  reducing  somewhat  the  mass  of  out- 
standing paper.  The  total,  which  had  exceeded  11,000,000 
gourdes,  was  reduced  on  January  i,  1907,  to  7,825,248,  and 
exchange  fell  from  506  per  cent,  in  January,  1906,  to  367^ 
per  cent.  The  partial  failure  of  the  coffee  crop  made  it  im- 
possible to  persevere  in  this  course.  The  collection  of  customs 
duties  in  gold,  under  a  law  passed  in  1907,  checked  importa- 
tions of  merchandise,  but  was  not  beneficial  to  Haitian 
industry  as  a  whole.2  The  National  Bank  manages  the  debt, 
and  is  exempt  from  taxation  upon  its  property  and  notes. 
None  of  its  own  notes  has  been  in  circulation  during  the 
paper-money  regime,  but  the  bank  has  done  a  considerable 
discount  business  through  several  branches.  The  head  office 
is  at  Paris. 

Santo  Domingo  had  a  National  Bank  which  fell  upon  evil 
days  after  the  unsuccessful  attempt  to  introduce  and  maintain 
the  gold  standard  in  1894.  The  bank  has  gone  out  of  exist- 
ence, and  the  bank-notes  have  been  deprived  of  legal- tender 
quality  and  no  longer  circulate.  The  amount  outstanding 
at  the  close  of  1906  was  estimated  to  represent  in  gold  value 
$192, 195. 3  In  1897  tne  dollar  of  the  United  States  was 
adopted  as  the  monetary  unit,  and  since  the  convention  with 
the  United  States  in  1905  for  the  management  of  the  finances 
American  currency  has  been  generally  used.4 

Banking  in  British  Dependencies. 

The  bank-note  circulation  of  the  British  West  Indies  and 
of  British  Guiana  is  provided  chiefly  by  the  Colonial  Bank, 

1  !Uvy,  274. 

2  Report  of  J.  B.  Terres,  U.  S.  Consular  Reports,  June  28,  1907,  4. 

3  Report  of  the  Director  of  the  Mint,  1907,  261. 

4  Muhleman,  161. 


BANKING  IN  LATIN  AMERICA.  53! 

with  headquarters  in  London  and  branches  in  the  many 
British  dependencies  in  the  West  Indies  and  the  Caribbean 
Sea.  The  bank  was  created  by  a  Royal  Charter  in  1836, 
continued  by  an  Imperial  Act  of  1856.  The  paid-up  capital 
is  ^£600,000.  The  notes  of  the  bank  circulate  in  competition 
with  many  different  kinds  of  gold  and  of  token  currency, 
British,  American,  Mexican,  Spanish,  and  South  American, 
according  to  the  trade  relations  of  the  islands  where  the 
branches  of  the  bank  are  established.  The  need  for  currency, 
even  in  primitive  communities,  was  illustrated  by  a  curious 
experiment  which  was  carried  out  in  1844  by  the  Governor 
of  the  Falkland  Islands,  off  the  coast  of  Patagonia,  which 
at  once  supplied  the  absence  of  a  circulating  medium  and 
afforded  a  forerunner  of  the  system  of  maintaining  paper  by 
foreign  exchange.  A  temporary  paper  currency  was  issued, 
the  notes  being  described  by  the  governor  as  "of  the  most 
primitive  character,  written  by  hand  at  some  trouble  ;  they 
are  signed  by  myself,  *  on  the  part  of  the  Colonial  Govern- 
ment,' and  made  payable  to  bearer."  When  a  trader  arrived 
he  was  informed  that  upon  leaving  the  colony  any  of  these 
notes  in  his  possession  would  be  exchanged  for  a  Treasury 
bill  on  London.  Within  a  short  time  these  notes  were  re- 
deemed at  par.1 

In  Barbadoes,  after  Spanish  and  Mexican  dollars  had  been 
demonetized  in  1879,  the  coinage  consisted  of  British  tokens 
and  the  notes  of  the  bank,  but  accounts  began  to  be  kept  in 
dollars  and  cents.8  The  Virgin  Islands  are  practically 
dominated  by  the  Danish  currency  of  St.  Thomas,  but  the 
money  of  account  is  English.8  St.  Lucia  as  early  as  1841 
sought  to  put  a  limit  to  the  legal-tender  quality  of  token 
silver.4  The  prudent  management  of  the  Colonial  Bank  re- 
quires minute  attention  to  these  varying  local  conditions, 
not  only  of  currency,  but  of  trade  in  many  communities, 
and  the  reports  abound  with  references  to  the  rainfall  and 


1  Chalmers,  A  History  of  Currency  in  the  British  Colow??    '48. 

2  Ibid.,  58-59- 

3  Ibid.,  81. 

4  Ibid.,  92. 


532         HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

'the  state  of  the  sugar,  cotton,  cocoa,  and  other  crops  and 
influences  affecting  the  market  for  them.1  The  earthquake 
which  shook  Kingston,  Jamaica,  in  the  spring  of  1907,  de- 
stroyed the  building  of  the  bank  there,  and  reduced  profits 
for  the  half  year,  but  the  cost  of  rebuilding  was  covered 
by  the  bank's  insurance  fund.  The  total  assets  of  the  bank 
on  December  31,  1907,  were  £3,721,830.  The  principal 
items  of  liability  were  on  account  of  deposits  and  current 
accounts,  £1,897,082  ;  bills  payable,  etc.,  £537,984;  notes 
in  circulation,  £482,097."  The  note  circulation  has  in- 
creased only  slowly,  having  been  .£400,555  in  1891  and 
£452,672  in  1895.  In  Jamaica  the  Bank  of  Nova  Scotia 
has  a  branch,  which  in  1906  had  in  circulation  £26,138 
of  its  notes.3 

The  paper  currency  of  the  Bahamas  is  provided  by  the 
Nassau  Bank,  incorporated  in  1888,  with  power  to  issue 
notes  of  five  shillings  ($1.20)  and  upwards.  The  security 
required  for  the  notes  is  interest-bearing  securities  of  the 
United  Kingdom,  or  the  United  States  of  America,  or  any 
British  possession,  subject  to  approval  by  the  governor  in 
council,  or  coins  which  are  lawful  money  in  the  islands. 
The  notes  have  largely  driven  out  gold,  but  have  remedied 
the  dearth  of  subsidiary  silver.4  In  the  Bermudas  there 
is  no  paper  in  circulation,  but  bills  of  exchange  are  sold 
by  the  Treasury.5 

The  British  Guiana  Bank,  chartered  in  1836  by  the  local 
government,  provides  a  circulation  of  about  £80,000  in 
British  Guiana.  The  notes,  which  are  in  denominations  of 

1  Thus,  the  report  for  June  30,  1907,  declares  :    "  It  is  a  matter  for 
congratulation  that  the  governments  concerned  have  provisionally 
agreed  to  adhere  to  the  Brussels  sugar  convention  for  a  farther  period 
of  five  years  from  September  i,  1908,  the  British  Government,  how- 
ever, being  released  from  the  obligation  to  penalize  the  importation 
into  the  British   Islands  of  bounty-fed   sugar." — London  Bankers' 
Magazine,  November  1907,  LXXXIV.,  655. 

2  London  Bankers'  Magazine,  May,  1908,  LXXXV.,  771. 

3  Statesman' 's  Year  Book  for  1908,  311. 

4  Chalmers,  168. 

5  Statesman's  Year  Book  for  1908,  278. 


BANKING  IN  LATIN  AMERICA.  533 

$5,  $20,  and  $100,  do  not  entirely  exclude  those  of  the  Co- 
lonial Bank.1  In  British  Honduras  a  bank  was  established 
at  Belize  in  1903,  known  as  the  Bank  of  British  Honduras. 
United  States  currrency  is  the  standard  and  the  govern- 
ment had  in  circulation  in  1906  its  own  notes  to  the  amount 
of  $136,642." 

The  French  Colonial  Banks. 

The  banks  of  issue  of  the  French  colonies  in  America 
were  authorized  by  laws  of  the  republic  passed  in  1849, 
which  put  them  under  the  supervision  of  the  home  govern- 
ment and  under  certain  general  regulations.  These  banks 
were  authorized  to  issue  notes  no  smaller  than  25  francs  ($5) 
until  1874,  when  the  law  of  June  24th  reduced  the  limit  to 
five  francs  ($i).  The  circulation  was  limited  to  three  times 
the  metallic  reserve  and  the  liabilities  were  not  permitted  to 
exceed  three  times  the  capital.  The  French  colonial  banks 
have  a  common  agency  at  Paris  under  the  supervision  of  the 
Minister  for  the  Colonies.3  The  Bank  of  Martinique  and 
the  Bank  of  Guadeloupe  were  each  established  in  1853,  with 
a  capital  of  3,000,000  francs,  while  the  Bank  of  French 
Guiana  was  founded  in  1855  with  a  capital  of  300,000  francs, 
which  was  increased  in  1864  to  600,000  francs.  The  two 
older  banks  have  loaned  largely  on  the  growing  crops,  which 
has  brought  them  difficulties  and  losses  in  years  when  the 
crops  have  failed,  but  has  contributed  greatly  to  the  con- 
venience of  the  community.  The  Bank  of  Guadeloupe  had 
a  circulation  on  June  30,  1906,  of  7,399,720  francs  and  a 
metallic  reserve  of  2,623,940  francs.  The  Bank  of  Marti- 
nique had  a  circulation  of  5,687,655  francs  and  a  reserve 
of  2,112,595  francs.  The  Bank  of  French  Guiana  had  a 
circulation  of  2,429,150  francs  and  a  reserve  of  1,018,157 
francs.  Discounts  at  the  Bank  of  Guadeloupe  were  1,654,- 
ooo  francs  ;  Bank  of  Martinique,  2,204,000  francs  ;  Bank  of 


1  Chalmers,  138. 

*  Statesman's  Year  Book  for  1908,  304. 

3  Courtois,  190-94. 


534         HISTORY  OF  MODERN  BANKS   OF  ISSUE. 

French  Guiana,  3,819,000  francs.  It  was  advances  on  the 
crops,  however,  which  constituted  the  largest  item  of  re- 
sources at  the  two  insular  banks,  the  amount  of  such 
advances  at  Guadeloupe  being  5,152,000  francs  and  at  Mar- 
tinique 2,548,000  francs.1 

1  j&conomiste  Europ&en,  August  2,  1907,  XXXII.,  138. 


CHAPTER  XIX. 

BANKING  IN  AFRICA  AND   OCEANICA. 

Part  Played  by  English  Capital  in  Developing  Africa  and  the  Islands 
of  the  Pacific— Creation  of  the  National  Bank  of  Egypt — The 
State  Banks  of  Algeria  and  Morocco — The  Imperial  Bank  of 
Persia — The  Banking  System  of  Australia — English  Banking  in 
South  Africa — French  and  Portuguese  Colonial  Banks  in  Africa 
and  the  Pacific. 

THE  banking  experience  of  the  continents  of  Africa  and 
Asia  and  of  the  great  islands  of  the  Pacific  offers 
much  that  is  of  interest  to  the  monetary  historian,  in 
spite  of  the  comparatively  recent  creation  of  some  of  the 
banking  systems.  It  is  of  peculiar  interest,  among  other 
things,  because  it  has  put  to  the  test  certain  economic 
theories  under  conditions  which  could  not  have  been  found 
under  the  complicated  and  conservative  financial  manage- 
ment of  European  nations.  Several  of  these  will  be  discussed 
more  fully  in  the  next  chapter,  dealing  with  exchange  in  the 
Orient.  It  is  proper  here,  however,  to  point  out  the  large  part 
played  in  banking  in  the  undeveloped  countries  by  banks 
managed  from  I^ondon,  which  have  only  recently  encountered 
serious  rivalry  from  French  and  German  institutions. 

There  are  two  classes  of  banks  having  offices  in  L,ondon 
and  doing  business  outside  of  Great  Britain, — thirty- two 
colonial  banks  and  thirty  foreign  banks.  The  former  group 
includes  many  of  the  Australian  banks,  those  of  South  Africa, 
several  institutions  of  British  India,  and  two  Canadian  banks. 
Of  this  group  almost  the  entire  capital  is  furnished  in  Great 
Britain.  This  is  true  also  of  many  banks  of  the  second 
group,  like  the  Imperial  Bank  of  Persia,  the  Hong-kong 

535 


536         HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

and  Shanghai  Banking  Corporation,  and  the  National  Bank 
of  Egypt.  It  is  not  true,  however,  of  the  Great  French  and 
German  joint-stock  banks,  which  have  established  offices  in 
London  in  order  to  control  the  exchange  business  with  their 
own  countries.  Eliminating  these  institutions,  the  paid-up 
capital  of  the  colonial  banks  at  the  beginning  of  1908  was 
^37,570,505,  and  of  thirteen  foreign  banks  owned  in  England 
and  Scotland  ^11,549,700,  making  a  total  of  about  ^"49,- 
120,000  ($239,500,000).  Deposits  and  current  accounts  were 
^250,876,431  in  colonial  banks  and  about  ^100,000,000  in 
these  foreign  banks,  making  a  total  of  about  ^350,000,000 
($1,707, 000,000),'  which  was  nearly  equal  to  the  individual 
deposits  of  all  the  national  banks  of  the  United  States  as 
recently  as  1896.  While  these  deposits  are  by  no  means 
concentrated  entirely  in  London,  but  are  scattered  in  fact 
over  distant  quarters  of  the  earth,  they  give  to  English 
capital  the  control  over  exchange  operations  which  made 
London  throughout  the  nineteenth  century  the  clearing 
house  of  both  the  commercial  and  financial  operations  of  the 
world.  It  is  of  these  institutions  in  Africa  and  Oceanica 
that  this  chapter  treats. 

The  National  Bank  of  Egypt. 

Egypt  was  without  a  bank  of  issue  until  the  reforms  of 
Lord  Cromer  had  put  the  financial  organization  of  the 
country  upon  a  sound  basis  and  rendered  commercial  bank- 
ing possible.  The  National  Bank  of  Egypt  was  founded 
with  foreign  capital,  of  which  Sir  Ernest  Cassel  was  the 
representative  of  the  British  portion.  The  bank  derived  its 
authority  from  a  Khedival  decree  of  June  25,  1898,  to  which 
was  appended  a  copy  of  the  statutes,  providing  for  a  capital 
of  ,£3,000,000  sterling,  fully  paid  up.3  The  bank  was  created 
as  a  private  institution,  governed  by  a  council  of  twenty-two 
members,  of  whom  four  sat  at  London  charged  with  special 
functions.  The  government,  however,  was  allowed  to  name 

•These  figures  are  from  the  London  Economist^  May  23,  1908, 
LXVI.,  1089,  and  Supplement. 

4  Statuts  de  la  National  Bank  of  Egypt,  Art.  10. 


BANKING  IN  AFRICA   AND   OCEANICA.  537 

two  commissioners  with  supervisory  powers  and  to  ratify  the 
nominations  of  governor  and  deputy  governors  made  by  the 
council.  The  term  of  the  governor,  first  fixed  at  ten  years, 
was  ultimately  made  five  years.  The  chief  office  of  the  bank 
is  at  Cairo,  with  a  principal  branch  at  Alexandria  and 
agencies  throughout  Egypt. 

The  National  Bank  acted  from  the  first  as  banker  for  the 
Egyptian  Government,  but  in  1907  a  closer  relation  was  pro- 
posed by  which  the  bank  should  increase  its  capital  by 
^"500,000  and  hold  the  government  funds  as  a  matter  of 
right.  The  conduct  of  the  bank  in  obtaining  the  necessary 
funds  to  handle  the  big  cotton  crops  of  1906,  in  the  face  of 
monetary  stringency  in  Europe,  caused  much  gratification  in 
Egypt.  A  severe  crisis  due  to  the  abuse  of  credit  and  the 
issue  of  new  securities  broke  out  in  1907,  however,  consider- 
ably in  advance  of  the  crisis  in  America.  The  attempt  of  the 
bourse  committee  to  fix  minimum  prices  for  securities  was 
naturally  abortive,  but  had  the  tendency  to  relieve  the 
market  to  some  degree  by  the  exodus  of  securities  to  Europe.1 
The  necessity  of  a  more  concentrated  control  of  the  market 
and  of  greater  freedom  of  note  issue  were  among  the  in- 
fluences which  led  to  proposals  for  a  more  direct  share  of  the 
government  in  the  National  Bank,  but  as  finally  presented  to 
the  shareholders  in  the  summer  of  1908,  the  degree  of  gov- 
ernment control  did  not  go  as  far  as  was  first  proposed.3 
The  Bank  of  Egypt  participated  in  the  creation  of  a  bank  in 
Abyssinia  in  1907." 

The  difficulties  of  the  bank  were  enhanced  in  Egypt  in 
periods  of  pressure  by  the  fact  that  paper  currency  was 
almost  unknown  and  that  it  was  necessary  to  meet  demands 


1  Economiste  Europ&en,  June  28,  1907,  XXXI.,  812. 

2  According  to  an  authorized  statement  in  the  Egyptian  Gazette, 
it  was  first  intended  to  give  to  the  government  a  large  share  in  the 
bank's  affairs,  but  under  the  arrangement  finally  proposed  the  gov- 
ernment agreed  to  use  the  bank  as  long  as  satisfied  with  its  adminis- 
tration, reserving  the  right  to  give  notice  of  withdrawal  if  it  became 
dissatisfied. — London  Economist,  March  28,  1908,  LXVI.,  673. 

3U.  S.  Consular  Reports,  April  19,  1907. 


538         HISTORY  OF  MODERN  BANKS  OP  ISSUE. 

for  money  by  the  importation  of  gold.  It  is  believed  that 
large  stocks  of  gold  are  hoarded  by  the  natives  and  that 
these  might  be  gradually  released  if  a  more  elastic  system  of 
note  issue  were  sanctioned.1  The  original  basis  of  the  note 
issue  was  the  English  model  of  covering  the  notes  in  full  by 
specie  on  fixed  securities.  The  statutes  required  that  the 
service  of  note  issue  should  be  separate  from  commercial 
operations,  as  at  the  Bank  of  England,  and  that  the  issue 
should  be  covered  by  gold  to  the  amount  of  at  least  one-half 
and  the  remainder  by  securities  approved  by  the  government. 
The  notes  were  made  a  first  lien  upon  this  covering.3  Even 
under  these  restrictions  the  note  issue  was  nearly  doubled 
between  1905  and  1906,  the  average  of  the  former  year  having 
been  913,216  Egyptian  pounds  and  of  the  latter  year  1,804,334 
Egyptian  pounds.  The  increase  was  largely  in  notes  of  one 
Turkish  pound  and  fifty  piasters.3  The  circulation  on  De- 
cember 31,  1907,  had  risen  to  £2,600,000  (Turkish)  covered 
by  securities  to  the  amount  of  ,£1,149,954  and  specie  to  the 
amount  of  ;£i, 450,046.  Of  the  notes  outstanding  ^469, 653 
were  in  the  reserves  of  the  banking  department  of  the  bank, 
which  also  held  £1,700,827  in  free  gold  and  silver. 

The  commercial  operations  of  the  bank  have  attained  a 
considerable  magnitude  during  its  short  term  of  life.  Total 
assets,  apart  from  the  note-issuing  department,  were  at  the 
close  of  1907  £10,779,404  in  Turkish  money,  of  which  invest- 
ments for  short  terms  represented  .£1,563,333 ;  advances  in 
local  and  foreign  securities,  £"2,151,858;  foreign  bills, 
.£1,178,516  ;  investments  in  government  securities,  .£1,084,- 
017  ;  and  cash,  as  already  stated,  ^"2,170,480.* 

•London  Economist,  July  6,  1907,  LXV.,  1138. 
^Statuts,  Art.  5. 

3  Moniteurdes  Interets  Materiels,  July  5, 1907,  2235.     The  Turkish 
pound  is  slightly   higher  in  value  than  the  pound  sterling,  being 
computed  by  the  United  States  Mint  at  $4-943 •     The  piaster  is  the 
hundredth  part  of  the  pound.     Cf.  Meliot,  Dictionnaire  des  Monnaies, 
129-30. 

4  Bilan  £tabli  au  j/  Decembre,  rgoj,  furnished  through  the  courtesy 
of  Mr.  Home,  Deputy  Governor.     The  balance  sheet  in  English  money 
is  given  in  London  Bankers'  Magazine,  May,  1908,  LXXXV.,  778. 


BANKING  IN  AFRICA  AND   OCEANICA.  539 

The  Bank  of  Algeria. 

The  circulation  of  Algeria  is  furnished  by  the  Bank  of 
Algeria,  which  was  given  the  exclusive  privilege  of  note 
issue  by  the  Act  of  August  4,  1851.  The  capital  of  the  bank 
was  originally  3,000,000  francs,  but  is  now  25,000,000  francs. 
The  notes  are  legal  tender  at  public  depositaries  and  by  indi- 
viduals. The  cash  reserve  is  not  permitted  to  be  less  than 
one-third  of  the  amount  of  the  notes  and  current  accounts. 
The  capital  of  the  bank  is  invested  in  French  public  securities 
and  the  director  is  appointed  by  the  President  of  the  Repub- 
lic upon  the  nomination  of  the  Minister  of  Finance.  A  limit 
of  circulation,  to  the  amount  of  18,000,000  francs,  was  fixed 
by  the  law  of  August  12,  1870,  which  suspended  specie  pay- 
ments for  Algeria  as  well  as  for  the  Bank  of  France,  but  the 
maximum  circulation  was  three  times  increased  until  it  was 
fixed  by  the  law  of  March  26,  1872,  at  48,000,000  francs. 
The  resumption  of  specie  payments  was  followed  by  the  law 
of  April  3,  1880,  which  abolished  a  fixed  limit  and  left  the 
circulation  to  be  governed  by  the  law  of  1851-.' 

The  absence  of  any  mortgage  banking  institution  in  Algeria 
led  the  bank  into  the  dangerous  path  of  loans  secured  upon 
real  estate,  many  of  which  had  to  be  foreclosed  in  order  to 
escape  loss.  Although  the  Credit  Fonder  d'AlgSrie  was 
authorized  late  in  1880,  the  management  of  the  older  bank 
had  already  promised  the  government  to  lend  its  aid  to  the 
development  of  colonization  and  to  this  end  adopted  the 
policy  of  rediscounting  the  paper  of  the  mutual  societies  of 
agricultural  credit.2  This  policy  was  in  violation  of  the 
spirit  of  the  statutes  of  the  bank  and  led  to  gross  abuses. 3 
Even  when  the  error  was  discovered,  in  1887,  it  could  not  be 


1  Courtois,  197. 

8  Vignon,  La  France  en  Algtrie,  266-67. 

3  Garrot  declared  in  1892  that  the  agents  of  the  bank  made  it  their 
principal  occupation  "  to  deal  in  lands  and  buildings,  to  buy  and  sell 
wine,  grain,  lumber,  coal,  cattle,  swine,  and  other  live  stock, — every- 
thing in  fact  foreign  to  or  at  least  outside  the  programme  of  an 
establishment  of  credit." — La  Banque  de  VAlg&rie,  194. 


540         HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

at  once  corrected.  In  May,  1892,  agricultural  paper  was  still 
held  to  the  amount  of  25,397,023  francs  ($4,900,000)  and  it 
became  necessary  in  1900  to  enter  into  a  special  convention 
with  the  Ministry  of  Finance  to  charge  heavy  losses  against 
the  surplus  funds  of  the  bank.1 

The  revision  of  the  charter  in  1900  extended  the  privileges 
of  the  bank  to  December  31,  1920,  but  imposed  the  same 
limitation  as  was  imposed  upon  the  last  renewal  of  the 
charter  of  the  Bank  of  France, — that  the  privilege  might  be 
terminated  on  December  31,  1912,  if  so  voted  by  the  Chambers 
during  the  year  191 1.  In  other  respects  also  the  new  charter 
conformed  to  that  of  the  Bank  of  France.  The  limit  of  cir- 
culation was  fixed  at  150,000,000  francs,  but  the  requirement 
of  a  metallic  reserve  of  one-third  was  superseded  by  the  more 
liberal  provision  that  the  bank  should  so  regulate  the  rela- 
tions of  reserve  and  commercial  paper  to  its  obligations  that 
it  should  never  be  exposed  to  the  necessity  of  delaying  the 
payment  of  its  engagements  on  demand.  The  convention  of 
January  30,  1900,  was  confirmed,  that  a  permanent  advance 
should  be  made  to  the  Treasury  of  3,000,000  francs.  It  was 
also  required  that  the  bank  pay  into  the  Treasury  an  annual 
sum  rising  from  200,000  francs  in  1900  to  300,000  francs  in 
1913.  These  sums  were  to  be  applied  to  the  creation  of  a 
bank  of  agricultural  credit.  In  order  to  prevent  abuses 
resulting  from  local  environment,  the  principal  office  of  the 
bank  had  already  been  transferred  to  Paris.  Branches  exist 
in  the  principal  towns  of  Algeria  and  by  the  decree  of  May 
7,  1904,  a  branch  was  established  at  Tunis,  with  auxiliary 
bureaux  at  other  points  in  the  province.  A  new  contribution 
was  required  to  the  Treasury  of  the  Bey  of  Tunis  of  i  ,000,000 
francs,  with  payments  rising  from  66,666  francs  to  100,000 
francs  annually,  these  funds  to  be  applied  to  the  extension  of 
agricultural  credit.2 

The  rapid  development  of  French  commercial  interests  in 
Algeria  called  for  a  further  elevation  of  the  limit  of  circula- 
tion ia  1907.  The  limit  was  raised  from  150,000,000  to  200,- 

1  Bulletin  de  Statistique,  July,  1900,  XL VIII.,  5. 
-  Ibid.,  May,  1904,  LV.,  557. 


BANKING  IN  AFRICA   AND  OCR  A  NIC  A.  54! 

000,000  francs,  and  authority  was  conferred  on  the  Ministry 
of  Finance  to  allow  two  additional  increases  of  50,000,000 
francs  each,  with  an  interval  of  two  years  between  each 
increase. f  The  circulation  had  already  reached  135,090,250 
francs  in  the  fiscal  year  1906  and  rose  to  150,565,360  francs 
on  October  15,  1907.  The  volume  of  discounts,  which  had 
been  994,009,992  francs  in  1906,  was  1,121,270,240  francs 
($216,400,000)  in  1907.  The  same  law  authorized  an  in- 
crease of  capital  from  20,000,000  to  25,000,000  francs,  which 
was  voted  by  the  stockholders  on  April  29,  1907. a 
The  State  Bank  of  Morocco. 

One  of  the  results  of  the  conference  of  the  Powers  at 
Algeciras  in  the  winter  of  1905-06  was  the  decision  to 
create  the  State  Bank  of  Morocco,  to  exercise  the  rights 
which  might  be  accorded  to  it  by  the  Sultan,  and  to  have 
the  exclusive  privilege  of  note  issue.  Its  privileges  run  for 
forty  years  from  the  ratifications  of  the  protocol  of  April  7, 
1906,  which  were  not  long  delayed.  The  capital,  which 
was  forbidden  to  be  less  than  15,000,000  francs,  might  be 
augmented  by  vote  of  the  shareholders.  The  shares  were 
divided  into  as  many  parts  as  the  Powers  participating  in 
the  conference  and  arrangements  were  made  for  their  sub- 
scription through  the  various  national  banks.  The  metallic 
reserve  was  required  to  be  fifty  per  cent,  of  the  issues  for  the 
first  two  years  after  the  opening  of  the  bank,  and  after  that 
date  not  less  than  one-third.  Of  these  required  reserves  at 
least  one-third  must  be  in  gold.3 

The  annual  report  of  the  State  Bank  for  1907  showed  total 
assets  of  23,580,064  francs,  of  which  3,975,419  francs  was  in 
specie,  5,347,217  francs  was  advanced  to  the  Government  of 
Morocco,  and  4,701, 875  francs  represented  the  unpaid  sub- 
scriptions of  shareholders.  The  net  profits  for  1907  were 
241,891  francs,  of  which  the  bulk  was  devoted  to  the  ex- 
penses of  organization.4 

1  Bulletin  de  Statistique,  April,  1907,  LXI.,  385. 

*  Moniteur  des  Interfts  Materiels,  Dec.  13,  1907,  4031. 

*  jfrconomiste  Europeen,  April  13,  1906,  XXIX.,  460-61. 
4  Moniteur  des  Intertts  Materiels,  July  5,  1908,  2209. 


542         HISTORY  OF  MODERN  BANKS  OF  ISSUE. 
The  Bank  of  Persia. 

The  Imperial  Bank  of  Persia  was  established  for  thirty 
years  by  a  group  of  English  capitalists  in  1889,  and  its  head 
office  is  in  London.  The  capital  of  the  bank  is  £650,000, 
with  authority  to  increase  to  £4,000,000,  and  the  metallic  re- 
serve is  required  to  be  at  least  one-third  of  the  amount  of  notes 
in  circulation.  The  excess  of  circulation  above  the  reserve 
is  not  allowed  to  exceed  the  amount  of  the  capital  actually  paid 
in.  The  reserve  may  consist  of  gold  or  silver,  but  the  charter 
provides  that  if  Persia  adopts  the  single  standard  of  gold 
or  silver,  three-fourths  of  the  reserve  shall  be  held  in  the 
metal  which  may  ba  adopted  as  the  standard.  The  notes 
constitute  a  first  lien  upon  the  reserve  and  may  be  redeemed 
at  the  expense  of  reducing  the  reserve  below  the  legal  limit.1 
Branches  of  the  bank  have  been  established  at  Teheran, 
Isfahan,  Tabriz,  Meshhed,  Shiraz,  Yezd,  Resht,  Kerman- 
shahan,  and  other  leading  points.  The  bank  advanced 
£500,000  to  the  Persian  Government  in  1892,  for  the  pur- 
pose of  buying  back  the  tobacco  monopoly  from  those  who 
held  it,  and  was  accorded  the  guarantee  of  reimbursement 
from  the  customs  duties.  The  dividends  paid  in  1895  were 
£35,000,  not  withstanding  some  losses  during  the  previous  few 
years  arising  from  the  depreciation  of  silver.2  The  net  profits 
of  1907,  in  spite  of  political  disturbances,  were  ,£278,215. 

In  spite  of  competition,  the  business  of  the  bank  has  in- 
creased rapidly  in  recent  years.  Total  assets,  which  were 
£1,402,694  in  1895,  were  £2, 189,027  on  September  20,  1907. 
The  growth  in  the  use  of  paper  currency  in  Persia  is  indi- 
cated by  the  increase  in  circulation  during  the  same  interval 
from  £72,668  to  ,£395,012  ($1,925,000).  The  circulation 
of  1906  was  £460,000.  Cash  on  hand  and  at  call  increased 
from  £141,986  in  1895  to  £387,093  in  1907,  discounts  from 
£799,726  to  £"1,167,049,  and  deposits  from  £239,164  to 
£549,048.' 


'  Levy,  236. 

3  Revue  des  Banques,  Dec.,  1894,  XIII.,  253. 

3  London  Economist,  May  23,    1908. 


BANKING  I.V  AFRICA    AND   OCEAN1CA.  543 

The  Banking  System  of  Australia. 

The  banking  system  of  Australia  was  organized  in  some 
respects  like  the  Scottish  system  prior  to  the  crisis  of  1893, 
but  was  not  managed  with  the  conservatism  and  good  judg- 
ment which  have  been  the  characteristics  of  Scotch  bank- 
ing. The  difficulties  developed  in  the  crisis  of  1893, 
were  not,  however,  the  result  of  any  excess  of  note  issues, 
but  of  the  error  common  in  new  countries, — excessive  specu- 
lation in  land  and  the  locking  up  of  assets  in  investments 
which  did  not  prove  immediately  productive.  The  original 
Bank  Act  of  Victoria,  passed  in  1864,  was  general  in  its  pro- 
visions, required  no  independent  audit  of  bank  accounts, 
and  imposed  no  definite  limit  upon  note  issues.  The  demand 
for  funds  for  speculation  in  land  led  to  heavy  loans  to  the 
speculators,  but  some  of  the  shrewder  bankers  evidently 
doubted  their  legality  and  secured  in  1888  an  important 
amendment  of  the  banking  law.  A  commission  was  ap- 
pointed, with  the  avowed  purpose  of  revising  the  law,  and  the 
act  which  resulted  from  their  deliberations  purported  to 
impose  new  safeguards  by  requiring  a  paid-up  capital  of 
,£125,000  for  banks  issuing  notes  and  by  making  the  notes  a 
first  charge  upon  the  assets.1  These  reforms,  however,  were 
apparently  only  the  cloak  for  the  new  provision  that,  ' '  Any 
incorporated  banking  company  may,  notwithstanding  any- 
thing to  the  contrary  contained  in  any  act  in  force  in  the 
Colony  of  Victoria  relating  to  such  banks,  advance  or  lend 
money  on  the  security  of  lands,  houses,  ships,  or  pledges  of 
merchandise. ' ' 

Banking  in  Australia  had  been  carried  to  its  extreme 
limits,  and  millions  of  English  and  Scotch  capital  were  at- 
tracted to  the  country  by  its  rapid  development  and  by  the 
fact  that  the  people  were  of  the  same  blood  and  presumably 
of  the  same  temper  in  business  matters  as  the  lenders.  The 

1  Mr.  MacFie,  London  Bankers'  Magazine ',  January,  1892,  LUL, 
68,  69.  Notes  constituted  an  unlimited  liability  in  Queensland,  and 
by  the  Act  of  1874  in  New  South  Wales.— lyoudon  Bankers'  Magazine, 
August,  1894,  I,  VIII.,  154. 


544          HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

banks  of  Victoria  alone  increased  their  aggregate  liabilities 
from  ^19,488,512  in  1880,  to  ^42, 224,084  in  1890,  while  the 
aggregate  assets  increased  from  ^23,284,822,  including  ^"3,- 
408,961  in  coin,  to  ^60,937,955,  including  ,£6,868,328  in 
coin.1  The  proof  of  the  activity  and  of  the  risks  assumed 
in  Australian,  banking  is  afforded  by  the  proportion  between 
available  deposits  and  the  discounts  and  advances  made  just 
before  the  crisis  of  1893.  ^ne  following  table  shows  how 
the  Australian  banks  loaned  "  up  to  the  hilt "  in  comparison 
with  the  more  conservative  English  banks a : 

Relation  of  Deposits  to  Loans. 


DEPOSITS. 

DISCOUNTS  AND  ADVANCES. 

London  Joint  Stock  Banks  .  . 
English  Provincial  Banks.  ... 
Australian  Banks 

^232,332,633 

62,272,817 

I4.Q  4.OO  ^2Q 

^148,942,304 
46,856,402 

1  =  4.  ej7  070 

The  proof  that  the  evils  which  carried  down  fourteen  great 
banks  and  closed  several  hundred  branches  in  the  spring  of 
1893,  grew  purely  out  of  bad  banking,  and  had  substantially 
no  connection  with  the  note  issues,  is  afforded  by  the  com- 
paratively small  figures  of  the  circulation.  The  banks  of 
Victoria  increased  their  note  circulation  only  from  ;£  1,236,- 
046,  in  1880,  to  ;£  i,  543, 340  in  1890,  and  in  1893  it  was 
substantially  the  same.  The  chief  medium  of  circulation 
in  Australia  was  gold,  and  the  Australian  people  were  so 
well  accustomed  to  British  methods  of  the  use  of  credit  that 
the  absence  or  presence  of  the  power  of  note  issue  would 
probably  have  made  little  difference  in  the  crisis  of  1893. 
The  inflation  of  credit  and  the  crisis  occurred  without  any 
great  expansion  of  note  issues,  and  if  the  habits  of  the  people 
had  required  a  concurrent  expansion  it  would  have  been 
only  an  incident  of  the  deeper  causes  of  the  crash.  As  M. 
Levy  sums  up  the  situation  3 : 


1  London   Bankers?  Magazine,  April,  1892,  LIIL,  580. 

2  Ibid.,  January,  1893,  LV.,  46. 

3  Melanges  Financiers,  299. 


BANKING  IN  AFRICA   AND   OCEAN  1C  A.  54$ 

It  is  worth  remarking  that  the  Australian  crisis  was  not  due  to  an 
excess  of  issues  of  bank-notes,  whose  figures,  on  the  contrary,  have 
never  ceased  to  restrain  themselves  within  reasonable  limits,  but  to 
the  large  lock-ups  upon  mortgage  advances  which  could  not  be 
repaid,  which  left  the  banks  without  the  liquid  resources  necessary  to 
satisfy  their  depositors. 

The  discredit  thrown  upon  the  notes  of  suspended  banks 
by  the  crisis  of  1893,  and  the  pressure  for  currency  which 
usually  accompanies  the  disappearance  of  credit,  led  to  a 
temporary  issue  of  government  notes  in  New  South  Wales 
and  to  some  modifications  of  the  banking  law.  The 
principal  change  affecting  the  bank-note  circulation  was 
the  adoption  of  the  provision,  enacted  in  Victoria  in  1888, 
making  the  notes  of  a  failed  bank  a  first  charge  on  the 
assets.  Bank-notes  were  made  a  legal  tender  except  at  the 
bank,  as  in  the  case  of  the  notes  of  the  Bank  of  England, 
and  the  amount  in  circulation,  in  excess  of  the  coin  reserve, 
was  not  permitted  to  exceed  one-third  of  the  capital,  nor  to 
exceed  in  any  case  ,£2,000,000. 

The  essential  difficulty  in  Australia  was  the  sudden  check 
to  the  current  of  British  capital  which  had  been  pouring  in 
and  even  quiet  withdrawals  of  much  of  it.  Careful  estimates 
showed  that  during  the  two  years  1891  and  1892,  before  the 
tide  turned  outward,  the  total  capital  imported  into  the 
colonies  was  ^25,083,000,  of  which  ^18,786,000  was  intro- 
duced by  various  governing  bodies.  During  the  three  years 
which  followed  there  were  withdrawals  of  private  capital  to 
the  amount  of  ^7,6 19,000.' 

The  future  of  Australian  banking  was  by  no  means  free 
from  storm-clouds  after  the  worst  of  the  crash  of  1893  was 
over.  The  banks  adopted  plans  of  reconstruction,  which  in- 
volved the  change  of  demand  and  time  deposits  into  deferred 
liabilities,  with  interest  in  most  cases  at  four  and  a  half  per 
cent.  This  plan  afforded  a  breathing  spell,  and  the  principal 
of  these  deposits  did  not  become  due  in  any  considerable 
amount  until  1898.  The  payments  required  in  that  year  by 
the  original  plans  were  ^10,605,772  ;  in  1899,  ;£Io>873,62O  ; 

1  Coghlan,  The  Seven  Colonies  of  Australasia,  1898,  4-7. 

35 


546        HISTORY  Of  MODERN  BANKS  OF  ISSUE. 

in  1890,  ,£12,258,320;  and  in  1901,  /8, 390,508.'  As  there 
was  grave  fear  that  English  and  Scotch  deposits  would  be 
further  withdrawn,  the  Australian  bankers  faced  as  serious  a 
problem  as  that  which  has  confronted  the  United  States 
during  the  long  period  of  the  withdrawal  of  foreign  capital 
which  followed  the  passage  of  the  silver  purchase  law  of  1890. 
It  was  indeed,  from  a  mathematical  standpoint,  much  more 
serious  in  the  case  of  Australia,  for  the  amount  of  liability  to 
Europe  was  computed  at  ^20,000,000,  or  at  the  rate  of  £16 
per  head  for  the  Australian  population.2  The  fact  that  the 
burden  was  proving  heavy  was  indicated  by  the  second  sus- 
pension, on  July  17,  1895,  of  the  City  of  Melbourne  Bank, 
with  liabilities  of  nearly  ^4, 000,000.  The  bank  first 
suspended  on  May  17,  1893,  and  reopened  on  July  igth 
following,  but  it  was  declared  by  the  directors  in  a  report  of 
March  31,  1895,  that  the  high  rate  of  interest  on  deposit 
receipts  could  not  be  maintained,  and  eventually  the  bank 
went  into  liquidation. 

Reviewing  the  effects  of  the  crisis  from  the  vantage  ground 
of  eleven  years,  its  results  upon  the  supply  of  capital  in 
Australia  were  thus  summed  up  by  Coghlan 8  : 

There  has  been  a  decrease  in  the  money  employed  in  Australia  by 
the  banks  of  issue  during  thirteen  years  to  the  extent  of  £"30,461,695. 
Within  the  same  period,  capital  to  the  extent  of  .£7,071,874  has  been 
written  off,  and  .£1,300,000,  the  capital  of  three  defunct  banks,  has 
also  been  lost ;  on  the  other  hand,  capital  (including  preferential 
capital)  to  the  amount  of  .£9,964,961  has  been  called  up.  It  may 
therefore  be  stated  that  approximately  .£1,593,087,  new  capital,  has 
been  obtained  by  the  banks  ;  so  that  the  actual  withdrawal  of  money 
has  been  greater  by  this  amount  than  shown  above,  and,  in  reality, 
the  total  withdrawals  may  be  put  down  at  £32,054,782.  The  greater 
part  of  the  money  withdrawn  consisted  of  British  deposits,  which 
the  banks  were  accustomed  to  accept  very  freely  in  the  period  before 
the  bank  crisis  of  1893.  The  extent  of  the  deposits  made  with  the 
branches  of  the  banks  in  Great  Britain  may  be  gauged  from  the  fact 
that  the  twelve  banks  from  which  returns  were  obtained  held  British 


1  London  Bankers1  Magazine, ]wz,  1894,  LVIL,  869. 

"Ibid.,  December,  1894,  I/VTII.,  741- 

*A  Statistical  Account  of  Australia  and  New  Zealand,  lys^-o^  787. 


BANKING  IN  AFRICA  AND  OCEANICA.  547 

interest-bearing  deposits  to  the  amount  of  ^"26,406,000,  while  the  nine 
smaller  banks  from  which  returns  were  not  obtained  are  estimated  to 
have  had  British  deposits  to  the  amount  of  ^"3,684,000  ;  so  that  the 
total  of  such  deposit  in  use  in  Australia  could  not  have  been  far 
short  of  ,£30,000,000. 

The  years  which  followed  1893,  therefore,  were  years  of 
conservatism  and  restriction  of  business.  Unpaid  capital 
was  called  up  by  the  banks  in  such  amounts  that  total 
capital  resources,  including  reserve  funds,  rose  from  £"14,- 
724,587  before  the  crisis  to  .£22,334,047  in  1898,  although  in 
the  meantime  two  banks  with  capital  of  ,£900,000  became 
defunct  and  capital  was  written  off  in  other  cases  to  the 
amount  0^4,731,550.  Reserve  funds  were  gradually  built 
up  until  capital  resources  rose  to  £28,365,464  in  1904  and  to 
.£29,672,740  in  1907.  Total  liabilities  fell  from  £"171, 660,791 
in  1895  to  ,£166,951, 237  in  1897.  L,ater  years  showed  an 
improvement,  which  was  accelerated  with  time  and  carried 
liabilities  in  1904  to  £"170, 7 10,593  and  in  19071,0  ,£203,178,212. 
Deposits  in  the  commercial  banks,  which  in  1901  were 
^107,522,000,  had  increased  in  1913  to  ^£"1 71, 181,000.  The 
largest  banks  in  Australia,  as  shown  by  their  deposit  accounts 
near  the  close  of  1913,  were  the  Bank  of  New  South  Wales, 
with  deposits  of  ^34,001,865  ;  the  Union  Bank  of  Australia, 
^21,334,590  ;  the  Commercial  Banking  Company  of  Sydney, 
^21,156,322  ;  and  the  Bank  of  Australasia,  ^"18, 088, 955. x 

The  Australian  banking  system  suffered,  before  the  union 
of  the  different  states,  from  lack  of  uniformity  of  regulation . 
It  was  also  threatened  by  the  tendency  to  state  socialism, 
which  crystallized  in  1910  in  a  law  providing  for  the  sub- 
stitution of  a  government  note  issue  for  the  circulation  of  the 
banks.  The  law  provided  that,  six  months  after  its  passage, 
issues  of  notes  by  the  separate  states  should  be  prohibited 
and  that  future  issues  by  incorporated  banks  should  be 
subject  to  a  heavy  tax.  The  Federal  Minister  of  Finance 
was  charged  with  the  issue,  retirement,  and  general  manage- 
ment of  the  new  note  issue,  which  was  made  legal  tender 

1  Vide  IvOndon  Statist,  Foreign  Banking  Section, May  23,  1914. 


548 


HISTORY  OF  MODERN  BANKS   OF  ISSUE. 


throughout  the  Australian  states.  The  notes  are  redeemable 
in  gold  at  the  capital,  and  are  protected  by  a  reserve  of  25 
per  cent,  up  to  the  amount  of  ,£7,000,000,  beyond  which 
amount  they  are  fully  covered  by  gold.  The  denominations 
of  notes  are  for  ten  shillings,  and  for  one,  five,  and  ten  pounds, 
and  multiples  of  ^10.  The  Minister  of  Finance  is  author- 
ized to  employ  the  proceeds  of  the  note  issue  to  strengthen 
the  gold  reserve,  to  buy  government  securities,  or  to  make 
deposits  in  the  banks.  He  is  authorized  to  issue  Treasury 
four-per-cent.  bonds  for  a  term  not  exceeding  five  years,  if 
necessary  to  protect  the  notes. r 

In  the  whole  of  Australasia,  recovery  from  the  depressing 
effects  of  the  crisis  of  1893  was  slow  until  after  the  close  of 
the  nineteenth  century.  From  that  time  forward,  however, 
improvement  became  more  rapid,  as  is  shown  by  the  following 
comparison  of  deposits: 


YEAR. 

ORDINARY  BANKS. 

SAVINGS  BANKS. 

TOTAL. 

1891 
1901 
I9II 
1913 

£119,460,000 
107,522,000 
170,212,000 
I75,l8l,OOO 

£l8,943,000 
38,150,000 
76,587,000 
94,462,000 

£138,403,000 
145,672,000 
246,799,000 
269,643,000 

The  Banks   of  South  Africa. 

The  strongest  banks  of  South  Africa  are  chiefly  English 
institutions,  with  their  head  offices  in  London.  The  Cape 
Government  passed  an  act  in  1891,  requiring  the  withdrawal 
of  circulating  notes  then  outstanding  and  the  deposit  of  se- 
curities with  the  Treasurer-General  to  cover  future  issues. 
The  only  securities  accepted  were  those  of  the  Cape  Govern- 
ment, which  tends  to  justify  the  belief  that  the  law  was  sug- 
gested by  the  necessity  for  placing  the  securities  rather 
than  the  benefit  of  the  banking  system.  The  notes  circu- 
late over  a  wide  area  and  no  provision  is  made  for  any  spe- 
cific coin  reserve.  The  note  issues  of  the  great  English 


'Levy,  Banques  d' Emission  et  Tresors  Publics,  pp.  312-13. 


BANKING  IN  AFRICA   AND   OCEANICA.  549 

banks  are  so  overshadowed,  however,  by  their  discount  and 
exchange  business  that  the  regulations  on  the  subject  are 
of  minor  importance.  The  development  of  the  gold  mines 
furnishes  a  metallic  circulating  medium  of  magnitude,  and 
British  methods  of  banking  by  transfers  of  credit  are  rapidly 
making  headway  into  the  interior  of  Africa.  The  unusual 
stimulus  given  to  business  in  South  Africa  during  the  past 
few  years  by  the  great  gold  discoveries  has  afforded  the 
banks  large  profits  and  encouraged  the  extension  of  branches 
over  the  vast  territories  which  have  come  under  English 
sovereignty.  The  combined  paid-up  capital  of  the  banks 
operating  in  the  Cape  of  Good  Hope  at  the  beginning  of 
1908  was  ,£4,456,925,  circulation  in  the  colony  only  was 
,£1, 104,454,  and  gross  assets  in  the  colony  were  ,£18 ,080, 509.' 
These  figures  did  not  include  circulation  and  assets  of  the 
same  banks  operating  through  their  branches  in  other  British 
dependencies  in  South  and  East  Africa. 

The  Standard  Bank  of  South  Africa  is  the  largest  of  the 
English  banks,  with  a  subscribed  capital  of  ,£6,194,100,  of 
which  one-quarter  has  been  paid  up,  and  a  reserve  fund 
of  ,£1,900,000.  Total  liabilities,  which  in  1895  were  ,£15,- 
873,509,  increased  to  ,£28,015,035  at  the  close  of  1906,  but 
declined  to  ,£26,171,558  at  the  close  of  1907.  The  decline 
was  due  to  general  trade  conditions  in  South  Africa,  which 
were  reflected  in  the  fall  of  the  note  circulation  on  December 
3ist  from  ^1,060,339  in  1906  to  ^929,333  in  1907.  The 
assets  at  the  last  date  included  ,£4,070,825  in  securities, 
,£9,913,436  in  discounts  and  advances,  ,£3,621,384  in  bills 
of  exchange,  and  .£4,057,821:  in  cash  in  hand  and  with 
bankers.2  The  usual  dividend  of  sixteen  per  cent,  was  re- 
duced for  1907  to  fourteen  per  cent.,  without  any  additions 
to  reserve. 3 

The  National  Bank  of  South  Africa  was  founded  in  1891, 
with  headquarters  at  Pretoria,  under  the  name  of  National 
Bank  of  the  South  African  Republic.  The  capital,  at  that 

1  Statesman's  Year  Book  for  1908,  214. 

8  London  Bankers'  Magazine,  May,  1908,  LXXXV.,  779. 

3  Ibid.,  LXXXV.,  726. 


55O         HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

time  ,£502,000,  was  afterwards  increased  to  £1,100,000. 
Total  assets,  which  were  £2,281,472  in  1894,  were  ,£7,814,649 
on  December  31,  1907.  Note  circulation  on  the  latter  date 
was  £2 15, 136,  covered  by  securities  as  required  by  the  new 
government  of  the  Transvaal.  The  assets  included  ,£730,387 
in  securities,  £3,323,305  in  discounts,  £i, 264, 693  in  bills  of 
exchange,  and  ,£1,218,976  in  cash  and  money  on  short 
notice.1 

The  Bank  of  Africa  has  twice  increased  its  capital  since 
1894,  and  the  amount  in  March,  1908,  stood  at  ,£1,000,000. 
Total  assets  increased  from  ,£4,683,249  on  June  30,  1895,  to 
,£8,680,863  on  December  31,  1907.  The  notes  outstanding 
on  the  latter  date  were  £"210,144,  and  the  assets  included 
the  securities  required  under  the  Cape  Colony  law.  All 
securities  held  were  valued  at  .£1,068,336;  bills  receivable, 
,£1,470,751;  loans  and  advances,  ,£2,598,668;  cash  and 
resources  on  short  notice,  .£1,453, I71-1 

The  African  Banking  Corporation,  which  has  an  author- 
ized capital  of  £2,000,000,  has  issued  only  £800,000,  of 
which  half  has  been  paid  up.  The  bank  increased  its  note 
issues  in  1895  in  order  to  extend  branches  into  Rhodesia, 
Natal,  and  the  Transvaal,3  and  its  circulation  on  March  31, 
1908,  constituted  .£4,058,371  of  total  liabilities  of  £5, 138,803. 
The  assets  contained  coin  and  notes  to  the  amount  of  £762,- 
185,  government  stocks  £"417,427,  and  discounts  £2,322,811. 
The  government  stocks  included  a  deposit  of  £378,369 
against  note  issues  in  the  Cape  Colony,  a  guarantee  which 
is  not  required  in  the  other  districts  where  the  notes 
circulate.4 

The  British  dependency  of  Natal  has  a  bank  of  issue 
known  as  the  Natal  Bank,  Limited,  with  a  paid-up  capi- 
tal of  £500,000  and  a  subscribed  capital  of  £1,741,160.  The 
total  liabilities  on  December  31,  1907,  were  £5,068,171  of 
which  £97,862  was  on  account  of  notes  in  circulation  and 


1  London  Economist,  May  23,  1908,  Supplement,  44. 
*  Ibid.,  May  23,  1908,  Supplement,  25. 

3  London  Bankers'  Magazine,  Nov.,  1895,  L,X.,  661, 

4  Ibid.,  July,  JQ08,  LXXXVL,  73. 


BANKING  IN  AFRICA  AND  OCEAN  1C  A.  551 

£"3,512,166  on  account  of  deposits  and  current  accounts. 
Discounts  and  loans  were  ,£2,919,112  and  coin  held  was 
,£707,000.' 

The  island  of  Mauritius,  500  miles  east  of  Madagascar, 
has  an  English  joint-stock  bank,  but  it  does  not  issue  notes. 
The  paid  up  capital  is  ,£125,550  and  total  assets  on  Decem- 
ber 31,  1907,  were  ,£447, 232."  The  Indian  rupee  is  the 
currency  of  the  island  and  the  money  in  which  local  accounts 
are  kept. 

French  and  Portuguese  Colonial  Banks. 

The  banks  of  the  French  colonies  have  long  been  subject 
to  general  laws,  establishing  supervision  in  Paris.  The  head 
of  each  bank  is  named  by  the  President  of  the  Republic  from 
a  list  of  three  names  submitted  by  the  supervisory  committee 
(commission  de  surveillance}  at  Paris.  He  is  not  permitted  to 
engage  in  business  nor  can  any  paper  endorsed  by  him  be 
accepted  for  discount.3  The  shareholders  have  the  right  to 
choose  three  of  the  four  members  of  the  administrative  com- 
mittee. The  colonial  banks  have  the  exclusive  privilege  of 
note  issue  in  the  territory  allotted  to  them,  and  in  1874  were 
allowed  to  reduce  the  minimum  denomination  of  notes  to 
five  francs  ($0.965).  The  notes  must  be  covered  by  specie 
in  the  proportion  of  one- third,  and  the  total  debts  of  the 
bank  are  not  permitted  to  exceed  three  times  the  capital  and 
surplus  unless  the  excess  is  fully  covered  by  specie.  The 
provision  bringing  the  surplus  into  the  computation  was 
made  in  the  law  of  December  13,  1901,  which  embodies  the 
last  extension  of  the  charters.  The  privilege  of  the  Bank  of 
Reunion  and  the  West  Indian  banks  was  extended  to  Janu- 
ary i,  1912.* 

The  banking  needs  of  French  West  Africa  were  met  for  a 
long  time  by  the  Bank  of  Senegal,  which  began  business 
August  4,  1855,  under  the  provisions  of  the  general  law  of 

1  London  Bankers'  Magazine,  May,  1908,  LXXXV.,  777. 
*  Ibid.,  May,  1908,  LXXXV.,  766. 

3  Goumain-Cornille,  Les  Banques  Coloniales,  36. 

4  Bulletin  de  Statistique,  December,  1901,  L.,  575. 


5$2         HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

April  30,  1849.  The  capital  of  the  bank  was  600,000  francs, 
and  up  to  1901  it  had  distributed  dividends  amounting  on 
the  average,  in  spite  of  some  serious  losses  in  1896  and  1897, 
to  eight  per  cent,  annually. '  The  great  extension  of  French 
interests  in  West  Africa,  however,  required  an  institution  of 
larger  capital  and  wider  scope.  This  was  provided  by  the 
Bank  of  West  Africa  (Banque  de  T  Afrique  Occidentale],  which 
was  incorporated  soon  after  the  revision  of  the  colonial  gen- 
eral banking  law  in  1901.  The  new  institution  was  created 
with  a  capital  of  1,500,000  francs  ($300,000)  fully  paid  up. 
Of  this  amount  900,000  francs  was  issued  to  the  shareholders 
of  the  Bank  of  Senegal  at  the  rate  of  150  per  cent,  for  the 
nominal  value  of  their  shares.  The  Bank  of  Senegal  was 
thus  fused  completely  with  the  new  institution,  which  soon 
took  measures  to  increase  its  capital  to  approximately  6,000,- 
ooo  francs.2  The  Bank  of  West  Africa  serves  a  wide  area  of 
country,  over  which  it  has  extended  its  branches  as  rapidly 
as  conditions  permitted.  The  circulation  rose  from  3 , 658 , 500 
francs  on  June  30,  1904,  ^6,943,525  ($1,340,000)  on  June  30, 
1906.  Cash  resources  on  the  earlier  date  were  3,604,227 
francs  and  on  the  later  date  3,427,198  francs  ($662, ooo).3 

The  Bank  of  Reunion — an  island  east  of  Madagascar — 
was  founded  July  4,  1853,  under  the  colonial  banking  law  of 
1849,  with  a  nominal  capital  of  4,000,000  francs.  The  bank 
was  very  successful  for  several  years,  showing  average  dis- 
counts for  the  five  years  ending  with  1860  of  18,539,000  francs 
($3,575,000).  The  sudden  drop  in  the  sugar  market  in  1857- 
8  was  met  by  raising  the  discount  rate  to  seven  per  cent,  and 
reducing  advances  to  4,000,000  francs,  and  was  passed  with- 
out loss.4  The  authority  granted  the  bank  in  1870,  to  lend 
on  merchandise  to  its  full  value,  was  abused  and  caused 
some  losses,  but  did  not  prevent  the  declaration  of  dividends 


1  Goumain-Cornille,  161. 

*  The  amount  actually  taken  up  to  January  28,  1906,  was  5,986,500 
francs— fcconomiste  Europten,  August  2,  1907,  XXXII.,  140. 

3  Economiste  Europ&en,  May  26,  1905,  XXVII.,  650,  and  August  2, 
1907,  XXXII.,  139. 

4  Denizet,  Les  Banques  Coloniales,  163-70. 


BANKING  IN  AFRICA   AND  OCEANIC  A.  553 

as  high  as  twenty-two  per  cent,  in  1880. '  These  high  divi- 
dends, however,  marked  a  precarious  situation,  which  was 
revealed  by  the  sugar  crisis  of  1884.  An  inspector  of  finan- 
ces sent  from  France  reported  that  the  capital  of  the  bank 
was  seriously  impaired,  and  forbade  the  distribution  of  further 
dividends.8  A  new  crisis  in  the  sugar  market  in  1890,  which 
carried  quotations  down  from  60  to  36  francs  per  100  kilos, 
and  the  crash  of  the  Credit  Agricole,  with  serious  entangle- 
ments with  the  bank,  finally  reduced  the  latter  to  such  a  con- 
dition that  the  government  came  to  its  rescue  by  the  decree 
of  July  8,  1898,  granting  a  subsidy  of  1,500,000  francs.  The 
suspension  of  dividends  for  five  years  and  greater  prudence 
in  making  loans  gradually  restored  the  bank  to  solvency, 
but  it  had  a  difficult  problem  in  providing  for  the  large 
volume  of  its  notes  piled  up  in  the  public  Treasury  in  payment 
for  exchange  on  France,  which  it  was  unable  to  redeem  at 
the  time  of  the  crisis.3  The  capital  of  the  bank  was  reduced 
in  1899  to  3,000,000  francs,  which  is  invested  in  French 
three  per  cents.  The  circulation  on  June  30,  1906,  was 
8,952,057  francs  ($1,727,000)  and  the  cash  reserve  3,023,498 
francs  ($583,000). 

The  French  island  of  New  Caledonia,  east  of  Australia, 
was  dowered  with  a  bank  in  1871,  which  was  at  first  con- 
nected with  the  development  of  large  land  enterprises.  The 
inconvenience  of  this  combination  was  soon  recognized  and 
the  bank  was  given  a  separate  entity  by  decree  of  July  14, 
1874,  with  a  capital  of  4,000,000  francs  and  the  name  of 
Bank  of  New  Caledonia.  Even  this  step  did  not  greatly 
prolong  its  life.  Imprudent  loans  wiped  out  the  capital  and 
compelled  suspension  on  October  16,  1877.  In  order  to 
meet  the  dearth  of  currency,  the  government  issued  Treasury 
bonds  to  the  amount  of  1,500,000  francs,  from  five  to  one 
hundred  francs  in  denomination,  and  in  1888  a  branch  of  the 
Bank  of  Indo-China  was  established  in  the  island.4 


1  Goumain-Cortrille,  154. 
8  Denizet,  177. 

3  Economiste  Europfan,  August  2,  1907,  XXXII.,  140. 

4  Goumain-Cornille,  112-15. 


554         HISTORY  OF  MODERN1  BANKS  OF  ISSUE. 

The  dependencies  of  Portugal  are  provided  with  banking 
facilities  by  the  National  Ultramarine  Bank  (Banco  National 
Ultramarino),  which  was  created  by  a  royal  decree  of  August 
12,  1864,  with  a  nominal  capital  of  12,000,000  milreis  ($12,- 
960,000),  of  which  3,600,000  milreis  was  actually  subscribed. 
The  field  of  operation  of  the  bank,  which  was  originally 
limited  to  a  few  of  the  colonies,  was  extended  to  all  by  a  law 
of  April  27,  1901,  and  the  bank  was  required  to  establish 
branches  at  once  in  the  many  Portuguese  establishments  in 
the  West  Indies,  Asia,  and  Africa.  The  capital  was  to  be 
advanced  to  5,000,000  milreis  by  February,  1903,  and  after- 
wards by  successive  stages  to  12,000,000  milreis.  The  bank 
was  given  the  exclusive  privilege  of  issuing  notes  in  the 
colonies,  but  this  privilege  was  only  until  November  30, 
1911.  The  limit  of  note  issue  is  that  of  the  original  capital, 
12,000,000  milreis,  and  the  notes  are  of  three  types:  large 
denominations  in  pounds  sterling  (^5,  ^10,  and  ^20) ; 
silver  notes,  from  one  milreis  ($1.08)  up  to  100  milreis 
($108) ;  and  copper  notes  of  one  and  two  milreis.  The 
earnings,  after  setting  aside  fifteen  per  cent,  for  reserves  and 
smaller  items  and  a  first  dividend  of  eight  per  cent,  for 
shareholders,  are  divided  equally  between  the  bank  and  the 
government.  The  share  of  the  state,  however,  must  not 
fall  below  the  taxes  prescribed  on  circulation,  which  are  a 
quarter  of  one  per  cent,  up  to  3,000,000  milreis  and  one- tenth 
per  cent,  additional  for  each  increase  of  issues  by  the  amount 
of  500,000  milreis.  The  bank  makes  an  advance  to  the  state 
without  interest  of  1,200,000  milreis,  to  be  employed  only  for 
the  colonies,  and  performs  giatuitously  where  it  has  branches 
all  the  operations  of  the  colonial  Treasury.1 

i  Goumain-Cornille,  266-68. 


CHAPTER  XX. 

BANKING    IN  JAPAN   AND   KOREA. 

Early  Japanese  Experiments  with  Paper  Money  and  with  the  Ameri- 
can Banking  System — The  Reform  of  1878  and  the  Creation  of 
the  Bank  of  Japan — How  it  Took  up  the  Notes  of  the  National 
Banks — Comprehensive  Work  of  Count  Matsukata — The  Adop- 
tion of  the  Gold  Standard  in  1897 — How  the  New  Mechanism 
Bore  the  Strain  of  War  with  Russia — The  Bank  of  Taiwan  and 
the  Monetary  System  of  Korea. 

THE  Empire  of  Japan,  after  her  introduction  to  western 
civilization  and  the  settlement  of  her  internal  troubles, 
showed  her  admiration  for  things  American  by  ex- 
perimenting with  government  paper  money  and  adopting  the 
system  of  local  national  banks  issuing  notes  on  the  security  of 
the  public  debt.  This  system  soon  broke  down  and  the  far- 
sighted  financial  administration  of  Count  Matsukata  adopted 
the  European  system  of  a  central  bank  of  issue  and  supple- 
mented it  later  by  the  introduction  of  the  gold  standard.  It 
was  by  the  aid  of  this  reorganized  monetary  mechanism  that 
Japan  was  enabled  to  enter  upon  the  career  of  Oriental 
empire  which  resulted  in  her  victories  over  Russia  in  1904 
and  1905  and  the  extension  of  her  influence  over  Formosa 
and  Korea. 

Paper  money  was  in  use  in  Japan  for  many  generations, 
but  its  recent  history  dates  from  1867.  That  year  was 
marked  by  the  overthrow  of  the  feudal  system,  which  had 
long  prevailed  in  the  Empire,  and  the  restoration  of  the 
power  of  the  Mikado.  It  was  considered  necessary  to  con- 
tinue the  circulation  of  the  existing  paper  money  in  order 
to  pay  the  indemnities  granted  to  the  feudal  lords  for  the 

555 


556         Jli STORY  OF  MODERN  BANKS  OF  ISSUE. 

surrender  of  their  privileges  and  their  land  taxes.  A  new 
form  of  paper,  bearing  the  traditional  emblems  of  the  Empire, 
was  adopted  and  acquired  a  more  general  circulation  than 
the  old.1 

The  local  banks  of  issue  were  authorized  under  the  name 
of  national  banks  by  a  law  of  1872.  The  law  was  passed 
largely  to  prevent  the  fall  in  value  of  the  government  paper 
money,  and  the  redemption  of  the  paper  was  partially  pro- 
vided for  by  the  issue  of  government  stocks.  The  banks 
were  required  to  purchase  the  stocks  in  order  to  issue  circu- 
lating notes  and  were  at  first  required  to  redeem  their  notes 
on  demand  in  gold.  The  depreciation  of  silver  and  the 
excess  of  paper  caused  such  a  persistent  demand  for  the 
conversion  of  the  notes  that  the  banks  were  authorized  in 
1876  to  redeem  in  government  paper  money.  The  capital 
of  these  banks  was  allowed  to  consist  of  any  form  of  govern- 
ment stock,  and  the  banks  were  required  to  leave  this  stock 
in  the  custody  of  the  government,  receiving  eighty  per  cent, 
of  the  amount  in  paper.  There  was  almost  a  mania  for  new 
banks  between  1876  and  1879  and  the  number  in  operation 
at  the  close  of  the  latter  year  was  153.  Paper  fell  in  1877 
fifty  per  cent,  in  relation  to  gold,  and  the  situation  was  made 
worse  by  the  issue  of  27,000,000  yen  in  government  notes  to 
pay  the  expenses  of  putting  down  the  rebellion  of  1877-78. 

An  effort  was  made  in  1878  to  bring  order  into  the  dis- 
ordered financial  system  by  the  suspension  of  further  issues 
of  paper,  the  issue  of  short-term  Treasury  bonds  bearing  in- 
terest, exchangeable  for  government  notes,  and  the  issue  of 
long-term  bonds  bearing  interest  at  seven  per  cent,  and  pay- 
able in  silver.  It  was  announced  that  the  redemption  of  a 
portion  of  these  bonds  annually  would  be  accompanied  by 
the  burning  of  an  equal  quantity  of  paper  money.  These 
measures  were  completely  successful.  The  breaking  down 
of  feudal  barriers  developed  the  domestic  commerce  of  the 
country  and  stimulated  a  production  of  commodities  which 
found  an  outlet  abroad  and  brought  silver  pouring  into  Japan 
in  payment.  The  banks  bought  up  the  depreciated  paper 

1G.  Boissonade,  Journal  dcs  Econornistes,  Sept.,  1895,  410. 


BANKING  IN  JAPAN  AND  KOREA.  557 

money  so  rapidly,  in  order  to  exchange  it  for  bonds,  that  the 
issue  of  bonds  had  to  be  temporarily  suspended  to  prevent 
too  great  a  rarefication  of  the  circulating  medium.  A  mint 
was  opened,  specie  was  received  at  the  custom-houses  at  its 
current  value  in  paper,  and  in  less  than  seven  years  (in  1885) 
paper  was  within  five  or  six  per  cent,  of  par. 

The  new  policy  was  promoted  by  the  creation  in  1882  of 
the  Bank  of  Japan,  with  capital  of  10,000,000  yen  ($5,000,000) 
and  with  powers  and  by-laws  closely  modelled  upon  those 
of  the  National  Bank  of  Belgium. '  The  life  of  the  bank  was 
fixed  at  thirty  years,  subject  to  renewal,  and  the  ownership 
was  limited  to  Japanese  subjects,  approved  by  the  Minister 
of  Finance.  The  bank  is  prohibited  from  becoming  a  share- 
holder in  industrial  corporations  and  the  directors  (meaning 
thereby  the  active  managers)  are  not  permitted  to  be  officers 
of  other  banks  or  corporations.  The  governor  and  vice- 
governor  are  appointed  by  the  state  for  terms  of  five  years  ; 
the  four  directors  are  elected  by  the  shareholders,  subject 
to  the  approval  of  the  Minister  of  Finance  ;  but  the  auditors 
are  chosen  by  the  shareholders,  without  restriction.  It  is 
provided  by  the  charter  that  "  The  government  shall  oversee 
the  business  management  of  the  bank,  and  may  not  only  stop 
acts  which  are  contrary  to  the  regulations  or  the  by-laws, 
but  also  those  which,  in  the  opinion  of  the  government,  are 
contrary  to  the  interest  of  the  state."  a 

It  was  the  avowed  purpose  of  creating  the  new  bank  to 
overcome  the  evils  of  the  depreciated  bank  paper  with  which 
the  country  had  been  flooded  under  the  system  of  note  issues 
by  local  banks  secured  by  bonds.  The  steps  taken  were 
direct  and  effective  and  form  an  interesting  example  to  any 
other  country  placed  in  a  similar  situation.  The  govern- 
ment had  been  gradually  accumulating  a  specie  reserve 
fund,  which  became  large  enough  in  1885  to  permit  an 
announcement  that  after  January  i,  1886,  it  would  begin  to 
be  paid  out  in  the  redemption  of  government  notes.3  Equally 

i  The  Adoption  of  the  Gold  Standard  in  Japan,  64. 

Imperial  Ordinance  XXXII.  of  June,  1882,  Art.  XXIV. 

3  The  government  did  not  hesitate  to  resort  to  taxation  in  order  to 


HISTORY  OF  MODERN*  BANKS  OF  ISSUE. 

important,  however,  was  the  withdrawal  of  the  notes  of  the 
so-called  national  banks.  These  notes  had  reached  an 
amount  of  34,420,000  yen  in  April,  1880,  and  still  stood  at 
29,501,484  yen  at  the  close  of  1885,  when  the  notes  of  the 
Bank  of  Japan  had  begun  to  enter  into  circulation. 

It  was  obvious  that  the  new  convertible  notes  could  not  be 
made  to  circulate  in  competition  with  a  mass  of  inconvertible 
paper,  forming  a  cheaper  method  of  making  payments. 
Provision  was  made,  therefore,  for  the  assumption  by  the 
Bank  of  Japan  of  the  entire  note  liability  of  the  national 
banks.  These  banks  were  required  to  turn  over  their  lawful 
money  reserves  to  the  Bank  of  Japan,  and  in  addition  to  pay 
each  year  to  that  institution  from  their  profits  an  amount 
equal  to  two  and  one-half  per  cent,  of  their  note  issues. 
These  sums  were  to  be  invested  in  securities  and  the  interest 
was  to  be  applied  to  the  retirement  of  the  notes  of  the 
national  banks.  Notes  received  in  this  way  by  the  Bank  of 
Japan  were  to  be  delivered  to  the  department  of  finance  for 
cancellation,  and  thereupon  the  bonds  deposited  as  security 
were  to  be  restored  to  the  banks  and  the  bond-secured  system 
was  to  die  a  quiet  death.  *  If,  after  fifteen  years,  there  still 
remained  national  bank-notes  which  had  not  been  redeemed, 
the  bonds  in  the  custody  of  the  Bank  of  Japan  were  to  be 
sold  to  afford  the  means  of  redemption. 

These  measures,  put  in  force  by  Imperial  ordinance  of 
May  5,  1883,  were  soon  supplemented  by  others.  The  Bank 
of  Japan,  which  at  the  close  of  1887  had  already  notes  in 
circulation  to  the  amount  of  53,454,803  yen  ($26,790,000), 
was  authorized  by  the  ordinance  of  August  i,  1888,  to  in- 
crease the  limit  of  its  authorized  circulation  to  70,000,000 
yen.  This  amount,  covered  by  securities,  might  be  exceeded 


obtain  these  funds.  In  1885  several  special  taxes  were  levied,  from 
which  one-half  of  the  surplus  revenue  "  was  devoted  to  the  redemp- 
tion of  inconvertible  paper  money,  while  the  other  half  was  added  to 
the  reserve  fund  with  the  object  of  employing  it  for  securing  the  im- 
portation of  specie  from  abroad." — The  Adoption  of  the  Gold  Standard 
in  Japan,  70. 
1  Ibid.,  80. 


BANKING  IN  JAPAN  AND  KOREA.  559 

by  any  amount  which  was  fully  covered  by  specie.  A  leaf 
was  taken  from  the  German  law  in  the  provision  that  the 
government  might  permit  the  extension  of  the  limit  of  circu- 
lation in  case  of  need,  subject  to  a  tax  of  five  per  cent.  The 
circulation  not  covered  by  specie  is  required  to  be  covered  by 
good  commercial  paper  or  Treasury  bonds.  Of  the  new  issue 
of  notes  authorized  by  the  ordinance  of  1888,  27,000,000  yen 
was  to  be  used  for  the  redemption  of  the  national  bank-notes, 
and  a  loan  of  22,000,000  yen  was  to  be  made  to  the  govern- 
ment for  the  purpose  of  cleaning  up  the  government  notes. 
By  the  close  of  1897  these  notes  outstanding  had  fallen  to 
7,451,098  yen,  national  bank-notes  stood  at  only  5,024,728 
yen,  and  the  convertible  notes  of  the  Bank  of  Japan  had 
risen  to  226,229,058  yen.  It  was  felt  that  the  time  had  come 
to  give  the  coup  de  gr&ce  to  the  old  notes.  This  was  done 
by  an  Act  of  June  10,  1898,  forbidding  the  circulation  of  the 
government  notes  after  December  31,  1899,  and  by  a  series 
of  laws  passed  somewhat  earlier  for  winding  up  the  note- 
issuing  functions  of  the  national  banks  and  converting  them 
into  joint-stock  banks.1 

Success  marked  every  stage  of  the  operations  of  the  Bank 
of  Japan  to  bring  order  into  the  conditions  affecting  the  paper 
currency.  So  evident  was  this  success,  even  before  the  re- 
form was  completed,  that  the  bank  was  authorized  in  August, 
1895,  to  increase  its  capital  to  30,000,000  yen  ($15,000,000). 
An  increase  of  capital  took  place  also  at  the  Yokohama  Specie 
Bank  in  March,  1896,  from  6,000,000  to  12,000,000  yen,  and 
in  September,  1899,  to  24,000,000  yen.  At  about  the  same 
time  (March,  1899),  the  Bank  of  Japan,  which  had  already 
in  1890  been  allowed  to  increase  the  limit  of  its  authorized 
circulation  to  85,000,000  yen,  was  again  given  authority 
to  increase  the  limit,  this  time  to  120,000,000  yen  ($60,000,- 
ooo).  Of  the  new  issues  of  35,000,000  yen,  15,000,000  was 
to  be  employed  in  facilitating  rediscounts  at  home  and 
exchange  operations  and  20,000,000  in  aiding  the  Specie 
Bank  in  promoting  trade  with  foreign  countries.2 

1  The  Adoption  of  the  Gold  Standard  in  Japan,  89-94. 

2  The  Post-Bellum  Financial  Administration  of  Japan,  248-51. 


560         HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

Japan  originally  employed  both  gold  and  silver  money,  but 
was  driven  to  the  silver  standard  when  the  restoration  of 
specie  payments  was  attempted  in  1882  and  suffered  incon- 
venience by  the  great  difference  of  exchange  with  gold-using 
countries.  There  was  serious  discussion  of  the  currency 
problem  and  some  agitation  in  favor  of  the  gold  standard. 
A  commission  was  appointed  in  September,  1893,  to  consider 
the  existing  state  of  the  currency  and  the  best  standard  for 
Japanese  interests.  The  result  of  their  deliberations  did  not 
prove  harmonious  and  only  individual  reports  were  first  sub- 
mitted to  the  government.  The  theory  that  a  high  premium 
on  specie  stimulates  exportations,  and  that  its  disappearance 
removes  this  stimulus,  was  not  verified  in  the  case  of  Japan. 
Exports  steadily  increased,  in  spite  of  the  rise  in  value  of  the 
paper  money  ;  but  this  phenomenon  is  partially  explained  by 
the  fact  that  the  rise  of  paper  in  relation  to  silver  was  neutral- 
ized by  the  fall  of  silver  in  relation  to  gold,  which  left  the 
paper  money  in  something  like  its  old  relation  to  the  gold 
standard  of  other  countries. 1 

The  war  indemnity  paid  by  China  under  the  treaty  of 
Shimoneseki  (April  17,  1895)  afforded  a  means  to  Japan,  as 
the  French  indemnity  had  to  Germany  in  1870,  of  establish- 
ing the  gold  standard  without  imposing  serious  financial 
burdens  on  the  country.  It  was  proposed  by  the  Japanese 
government  that  the  amount  of  this  indemnity,  fixed  origi- 
nally at  200,000,000  Kuping  taels,  should  be  converted  "  into 
English  money  at  the  rate  of  exchange  equal  to  the  average 
ratio  of  the  price  of  silver  bullion  to  that  of  gold  bullion  in 
the  London  market  during  the  three  months  previous  to  the 
day  the  method  of  payment  of  the  war  indemnity  is  agreed 


1  The  effect  of  the  silver  standard  in  Japan,  according  to  the  ob- 
servation of  Mr.  Soyeda,  who  is  in  the  best  position  to  know  the 
facts,  was  to  raise  domestic  prices  as  well  as  to  increase  the  burden 
of  gold  obligations  expressed  in  the  silver  standard.  He  says  :  "  The 
prices  of  exportable  goods,  such  as  rice,  the  chief  article  of  food, 
have  risen  a  great  deal.  Thus  the  effect  of  the  depreciation  was  felt 
not  only  in  the  external  trade,  but  also  in  the  internal  transactions." 
— Economic  Journal,  Dec.,  1894,  IV.,  732. 


BANKING  IN  JAPAN  AND  KOREA.  561 

to  between  the  two  governments. ' '  '  This  proposition  was 
accepted  by  the  Chinese  Government,  the  weight  of  the  tael 
was  fixed  at  575.82  grains  of  pure  silver,  and  exchange  was 
computed  upon  the  basis  of  quotations  in  the  JL/ondon  market 
for  June,  July,  and  August,  1895.  The  result  was  an  average 
price  per  ounce  of  30.4429  pence,  L,ondon  standard  (0.925 
fine),  and  the  indemnity  worked  out  at  ,£32,900,980. 

' '  Since  now  [it  is  naively  declared  by  the  official  report  on 
the  subject]  the  way  was  opened  for  the  creation  of  a  gold 
reserve,  the  finance  minister,  Count  Matsukata,  seeing  that 
the  time  was  fully  ripe  for  putting  into  effect  the  plan 
of  coinage  reform,  on  the  25th  February,  1897,  submitted 
the  drafts  of  the  coinage  law,  with  its  subsidiary  laws,  to  the 
Cabinet  Council."'  Before  this  time  (in  July,  1895)  the 
majority  of  the  monetary  commission  had  reported  in  favor 
of  the  gold  standard  and  the  accumulation  of  a  gold  reserve. 
Count  Matsukata  had  anticipated  also  the  favorable  action 
of  the  cabinet  by  beginning  to  bring  gold  bullion  and  British 
gold  coin  into  Japan.  These  operations,  involving  some  risk 
of  disturbance  to  the  exchange  market,  extended  from 
January  n,  1896,  to  March  31,  1899,  and  were  aided  by  the 
Bank  of  Japan  and  the  Yokohama  Specie  Bank.3  In  the 
meantime,  so  complete  was  the  mastery  of  the  ministry  over 
the  Diet  that  the  project  of  law  introduced  on  February  25th 
was  favorably  reported  on  March  loth  to  the  lower  chamber, 


1  This  contract,  amazingly  advantageous  to  Japan,  is  attributed  to 
a  suggestion  in  May,  1895,  by  Count  Matsukata,  then  finance  min- 
ister, to  Count  Ito.  A  memorandum  was  subsequently  drawn  up, 
seeking  to  show  the  losses  to  China  through  the  rise  in  the  price  of 
silver  if  she  sought  to  deliver  the  metal  to  Japan.  A  slight  conces- 
sion was  made  from  the  weight  of  the  tael  as  originally  proposed  by 
Japan. — See  The  Adoption  of  the  Gold  Standard  in  Japan,  168-72. 

*Ibid.t  174. 

3  Of  a  total  sum  of  £30,476,642  in  English  currency  which  was 
transferred,  £15,811,261  was  remitted  by  drafts,  £3,090,504  was  sent 
in  silver,  and  £11,574,876  was  sent  in  gold  bullion,  of  which 
£7,733»5i7  was  received  before  September  30,  1897,  and  promptly 
converted  into  Japanese  gold  coins. — The  Adoption  of  the  Gold 
Standard  in  Japan,  225. 
36 


562         HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

received  its  first  reading  in  the  House  of  Peers  on  March  isth, 
and  became  law  on  March  26,  1897.* 

The  monetary  reform  practically  gave  fixity  to  existing 
conditions  of  exchange,  as  had  been  done  in  Austria  and 
Russia.  The  amount  of  gold  in  the  old  standard  yen  was 
reduced  by  one-half  and  the  silver  yen,  which  had  been  the 
common  medium  of  circulation,  was  fixed  theoretically  at  the 
weight  of  26.956  grams,  nine- tenths  fine,  with  a  relation  to 
gold  of  one  to  32.34.a  Hence,  it  was  argued,  no  change  in  the 
existing  level  of  prices  would  result  from  the  change  of 
standard  and  the  old  silver  yen  would  circulate  side  by  side 
with  the  new  coins  of  gold.3  No  allowance  was  made  for  a 
possible  decline  in  silver,  but  it  was  rather  assumed  that  the 
action  of  Japan  in  abandoning  the  metal  as  a  standard  would 
accentuate  its  downward  course.  Gold  coins  of  the  new 
standard  were  offered  for  the  old  silver  yen,  which  were 
called  in  and  recoined  into  subsidiary  pieces  or  sold  as 
bullion.4  The  process  of  exchange  was  permitted  only  from 
October  i,  1897,  to  July  31*  l898,  but  was  so  complete  that 
no  reports  reached  the  authorities  of  any  of  the  old  money 
which  failed  to  be  exchanged.  Some  of  the  foreign  banks, 
fearing  that  the  reform  might  not  succeed,  issued  a  circular 
in  July,  1897,  reserving  the  right  to  pay  depositors  in  gold 
or  silver  at  their  option,  but  the  Bank  of  Japan  and  the 
Yokohama  Specie  Bank  exchanged  their  silver  in  bulk  for 
gold  on  or  about  October  i,  1897,  an(l  began  to  make  their 
payments  in  gold. 8 

1  The  Adoption  of  the  Gold  Standard  in  Japan,  192. 

3  The  value  of  the  new  yen  in  United  States  currency  was  49.8 
cents. 

a  Cf.  Bourguin,  in  Revue  d>  Economic  Politique,  1897,  XI.,  716. 

4  The  total  amount  redeemed  by  the  government  was  75,093,822 
yen  ($37,500,000).     Of  this  amount,  27,567,012  yen  was  recoined  into 
subsidiary  coins;  6,740,148  yen  were  taken  to  Formosa,  Korea,  and 
elsewhere ;  and  40,786,662  yen  were  sold  as  bullion,  chiefly  in  Shang- 
hai and  Hong-kong.      The  profit  on  the  subsidiary  coinage  more  than 
offset  the  loss  on  bullion  sold.—  The  Adoption  of  the  Gold  Standard 
in  Japan,  XI. 

5  Paultre,  in  Questions  Monetaires  Contemporaines,  757, 


BANKING  IN  JAPAN  AND  KOREA.  563 

The  determination  of  Japanese  financiers  to  make  the 
adoption  of  the  gold  standard  absolute  led  to  the  suspension 
of  coinage  of  pieces  of  one  yen  in  silver,  the  limitation  of 
the  legal  tender  quality  of  silver  to  ten  yen,  and  the  effort  to 
force  gold  into  general  circulation.  The  new  system  would 
probably  have  been  easier  to  maintain  if  a  larger  place  had 
been  left  for  silver  in  the  circulation,  as  was  done  in  British 
India  and  the  Philippines,  and  if  reliance  had  been  placed 
to  some  extent  upon  exchange  funds  abroad  instead  of  the 
segregation  of  gold  at  home.  The  high  value  of  the  gold 
coins  made  them  ill-adapted  to  the  smaller  transactions  of  the 
country.  They  gradually  found  their  way  into  the  coffers  of 
the  Bank  of  Japan,  when  they  were  not  exported,  and  were 
represented  in  the  circulation  by  the  paper  notes  of  the  banks.1 

The  prediction  that  trade  with  silver-using  countries  would 
decline  by  reason  of  the  adoption  of  the  gold  standard  did 
not  find  any  confirmation  in  events.  Silver  prices  had  risen 
on  the  average  about  fifty  per  cent,  between  1873  and  1894, 
rents  at  Tokio  more  than  one  hundred  per  cent. ,  and  wages 
about  thirty-three  per  cent.  The  stereotyping  of  these  con- 
ditions by  the  adoption  of  the  exchange  rate  of  the  day  did 
not  check  Japanese  exports  to  England,  which  more  than 
doubled  from  1897  to  I9O2>  while  exports  to  the  silver-using 
country  of  China  increased  in  a  somewhat  greater  ratio.8 
Economic  activity  was  greatly  stimulated  by  the  change  of 
standard,  a  closer  relation  was  established  with  the  money 
markets  of  the  world,  and  foreign  capital  began  to  be 
attracted  towards  the  country.3 

1  Duraolard  declared  in  1903  that  during  a  sojourn  of  several  yeais 
in  Japan  he  had  never  had  the  good  luck  to  receive  a  single  piece  of 
gold. — Lejapon,  Politique,  Economique  et  Social,  105. 

2  Pallain,  162-64.     This  writer  declares  that  "during  the  period  of 
the  monetary  depreciation  (up  to  1897)  while  the  premium  on   ex- 
change should,  according  to  some,  have  acted  as  an  increase  in  the 
customs  tax  and  an  encouragement  to  exportation,  the  increase  in 
importations  came  chiefly  from  gold-standard   countries,  like  Eng- 
land, while  the  exports  of  Japan  to  these  same  countries  increased  in 
a  feeble  degree."— Les  Changes  Strangers  et  les  Prix,  166. 

3  The  Post-Bellum  Financial  Administration  of  Japan,  197. 


564         HISTOR  Y  OF  MODERN  BANKS  OF  ISSUE. 

Notwithstanding  these  favorable  symptoms,  there  were 
circumstances  which  threw  a  doubt  on  the  question  whether 
the  economic  resources  of  Japan  were  ripe  for  maintaining 
the  new  monetary  system  in  the  form  in  which  it  was 
adopted.  The  large  imports  of  foreign  goods  led  to  a  drain- 
age of  gold  which  was  only  checked  by  the  negotiation  of 
loans  abroad.  Exports  of  gold  exceeded  imports  by  a  total 
of  about  42,800,000  yen  during  the  three  years  ending  with 
1900,  and  the  estimated  gold  stock  of  the  country  outside 
the  Bank  of  Japan  fell  to  52,930,394  yen  ($26, 4.50,000). * 
One  of  the  objects  of  establishing  a  stable  exchange  was 
apparently  accomplished,  however,  in  attracting  foreign 
capital,  as  shown  by  the  increase  in  the  capital  of  stock 
companies  from  532,522,377  yen  at  the  close  of  1897  to  887,- 
606,190  yen  at  the  close  of  1903.  Government  loans  were 
placed  in  London  in  1899  and  1902,  and  funds  on  deposit 
there  were  employed  from  time  to  time  as  exchange  funds 
for  protecting  specie  reserves  at  home.2 

The  resources  of  Japan  were  put  to  a  severe  test  in  the 
war  with  Russia,  but  it  was  a  test  from  which  the  Bank  of 
Japan  and  the  new  monetary  system  emerged  without  dis- 
credit. The  government  leaned  strongly  upon  the  bank  in 
finding  means  for  carrying  on  the  war.  It  was  declared 
in  the  annual  report  for  1905  that  the  bank  had  discounted 
Treasury  bonds  for  258,940,000  yen  and  commercial  paper 
for  301,845,010  yen,  and  that  it  had  bought  gold  and  silver 
to  the  amount  of  686.000,000  yen.3  Its  advances  to  the 
Treasury  on  current  account,  which  amounted  on  the  aver- 
age for  1903  to  19,900,000  yen,  reached  on  June  n,  1904, 
the  amount  of  34,300,000  yen,  but  were  reduced  on  August 
i3th,  as  the  result  of  the  loan  in  I/mdon,  to  19,000,000  yen. 


i  Financial  and  Economic  Annual  of  Japan,  1906, 152.  I  remarked 
on  the  more  favorable  estimate  of  1899,  which  was  93,360,986  yen,  or 
a  little  more  than  one  dollar  per  capita,  that  it  "was  perhaps  an 
inadequate  basis  upon  which  to  inaugurate  the  gold  standard." — 
Special  Report  on  Coinage  and  Banking  in  the  Philippine  Islands,  18. 

'2  The  Post-Bellum  Financial  Administration  of  Japan,  225. 

3  Raffalovich,  Le  Marche  Financier  en  7003-06,  578. 


BANKING  IN  JAPAN  AND  KOREA.  565 

Advances  by  the  bank  to  the  state,  which  had  been  on  the 
average  of  1903  36,900,000  yen,  reached  on  June  4,  1904, 
96,000,000  yen — an  amount  in  excess  of  the  gold  stock ;  but 
they  also  were  reduced  from  the  proceeds  of  the  foreign  loans.1 

Gold  began  to  leave  the  country  rapidly  and  only  the 
energetic  action  of  Mr.  Takahashi,  vice-governor  of  the  bank, 
in  obtaining  large  loans  for  the  government  in  L,ondon  and 
New  York,  averted  the  exhaustion  of  the  bank's  specie  re- 
sources. The  specie  reserve  on  May  31,  1904,  had  fallen  to 
68,087,261  yen  ($34,000,000),  gold  exports  ran  for  four 
months  at  an  average  of  14,000,000  yen  per  month,  and  the 
exchange  value  of  the  yen  declined  to  two  shillings  and  one- 
eighth  pence.3  Conditions  changed  with  the  subscriptions 
for  the  loans.  The  public  were  called  upon  to  bring  their 
gold  to  the  bank  and  the  government  transferred  to  its  vaults 
a  portion  of  the  proceeds  of  the  payments  made  in  lyondon 
and  directed  that  it  be  added  to  the  reserves.8  The  lowest 
point  subsequently  touched  by  the  specie  reserve  was  on 
December  31,  1904,  when  the  amount  was  83,581,226  yen  ; 
but  it  was  restored  from  the  proceeds  of  new  loans  and  did 
not  again  fall  below  100,000,000  yen. 

A  device  for  meeting  currency  demands  in  Manchuria  was 
adopted  by  the  government  of  Japan  similar  to  that  adopted 
by  Russia.  This  was  the  issue  of  "war  notes  "  expressed  in 
yen,  but  redeemable  in  silver.  They  were  issued  in  denomi- 
nations as  low  as  ten  sen  (five  cents)  and  as  high  as  ten  yen 
($5.00).  While  their  circulation  was  not  permitted  in  Japan, 
they  obtained  a  wide  currency  in  Korea  as  well  as  in  Man- 
churia, and  arrangements  were  made  to  convert  them  on 
favorable  terms  into  gold,  especially  when  received  by  Japa- 
nese merchants  for  goods  sold  in  Manchuria.4 


i  Helfferich,  119.  The  German  author  declares  that  "  Japan  availed 
herself  in  a  very  large  measure  of  the  central  bank  to  meet  her 
needs  for  money  and  for  a  certain  time  even  to  the  utmost  possible 
limit." — Les  Finances  des  Bellig Grants,  122. 

9  Le  Marche  Financier  en  1904-05,  615. 

3  Report  on  the  War  Finance,  23. 

4  Ibid. 


566         HISTORY  OF  MODERN  BANKS  OF  ISSUE. 


The  business  of  the  Bank  of  Japan  is  done  largely  through 
its  .note  issues,  as  in  the  case  of  the  Bank  of  France.  Not 
only  is  the  deposit  system  a  thing  of  recent  growth  in  Japan, 
but  such  private  deposits  as  exist  find  their  way  more  gen- 
erally to  the  joint-stock  banks  than  to  the  central  bank. '  As 
the  result  of  the  war  and  the  magnitude  of  the  enterprises 
carried  on  by  the  government,  especially  since  it  took  over 
the  tobacco  trade  and  the  railways,  a  large  part  of  the  re- 
sources of  the  Bank  of  Japan  are  absorbed  in  transactions  for 
the  state.  Hence  the  relatively  small  amounts  of  commercial 
bills  discounted  which  appear  in  the  table  below  of  the  op- 
erations of  the  Bank  of  Japan  for  representative  years  : 

Operations  of  the  Bank  of  Japan. 


DEC.  31 

CIRCULATION. 

SPECIE. 

BILLS  DISCOUNTED. 

(In  yen,  =  $0.498) 

1885 

3<  956,T6i 

3,3TI,46l 

1,314,567 

1890 

102,931,766 

44,622,413 

21,562,322 

1895 

180,336,815 

60,370,797 

34,690,723 

1900 

228,570,032 

67,349,129 

97,558,216 

1903 

232,920,563 

Il6,962,l84 

44,380,493 

1904 

286,625,752 

83,581,226 

69,595,6l6 

1905 

312,790,819 

"5,595,026 

109,184,177 

1906 

341,766,164 

147,202,125 

106,001,666 

1907 

369,984,111 

l6l,742,I3I 

124,609,071 

The  Bank  of  Taiwan  was  made  the  instrument  of  Japa- 
nese financial  influence  in  Formosa  in  1899.  It  was  not 
at  first  deemed  practicable  to  establish  the  gold  standard 
in  the  island,  and  a  loan  of  2,000,000  yen  in  silver  pieces 
of  one  yen  was  made  to  the  bank  by  the  government.  The 
capital  of  the  bank,  which  was  5,000,000  yen,  only  half 
paid,  was  subscribed  by  the  government  to  the  amount  of 
1,000,000  yen.9  The  ratio  of  the  silver  coins  to  gold  was 
fixed  for  a  time  by  the  authorities,  but  the  system  did  not 


1  The  Yokohama  Specie  Bank  had  deposit  balances  at  the  close  of 
1905  of  110,295,323  yen  and  1713  other  banks  657,292,232  yen. — Finan- 
cial and  Economic  Annual  of  Jopan^  1906,  142. 

2  The  Post-Bellum  Financial  Administration  of  Japan,  246. 


BANKING  IN  JAPAN  AND  KOREA.  567 

give  satisfaction,  and  an  ordinance  was  issued  by  the  For- 
mosan  administration  in  July,  1904,  authorizing  the  bank  to 
issue  notes  redeemable  in  gold,  and  suspending  the  legal 
tender  quality  of  the  silver  yen.  The  limit  of  authorized 
circulation  not  covered  by  gold  is  5,000,000  yen.  Notes 
beyond  this  amount  not  fully  covered  are  taxed  at  the  rate 
of  five  per  cent.  The  law  governing  the  bank  was  revised  in 
February,  1906,  bringing  its  organization  and  the  monetary 
system  of  the  island  into  conformity  with  those  of  Japan.1 

The  Monetary  System  of  Korea. 

The  national  money  of  Korea  was  originally  copper,  but 
its  extreme  bulk  led  to  the  gradual  introduction  of  Japanese 
silver,  even  while  Japan  was  on  the  silver  basis.  The  de- 
mand for  coined  silver  when  the  forces  of  the  powers  were 
seeking  to  rescue  their  legations  in  Pekin  in  1900  caused  the 
exportation  of  Japanese  yen  to  China  and  almost  denuded 
Korea  of  money.  The  void  was  soon  filled  by  Japanese 
paper,  which  practically  put  Korea  upon  the  gold  basis.2 
Under  the  agreement  of  August  22,  1904,  which  confirmed 
the  Japanese  protection  already  established  over  Korea  in 
1895,  the  latter  country  agreed  to  accept  a  Japanese  financial 
adviser  as  well  as  a  diplomatic  adviser.3  The  work  of 
financial  reform  was  promptly  inaugurated  by  the  withdrawal 
of  the  old  nickel  coins  and  the  substitution  of  a  complete 
system  of  gold,  silver,  and  subsidiary  coins  based  upon  the 
Japanese  system.  By  the  close  of  1907  it  was  estimated  that 
not  over  2,000,000  in  the  old  pieces  remained  in  circulation, 
while  new  coins  had  been  issued  to  the  amount  of  5,327,000 
yen,  of  which  4,024,300  yen  had  been  put  in  circulation.4 

The  Koreans  long  employed  an  interesting  system  of 
promissory  notes  which  acted  in  some  degree  as  a  substitute 
for  currency.  They  were  simple  in  form,  stating  only  the 
amount,  date  of  payment,  and  name  of  the  drawer.  The 

i  Financial  and  Economic  Annual  of  Japan,  1006,  150. 
8  M61iot,  Dictionnaire  des  Monnaies,  125. 

*  Statesman* s  Year  Book  for  1908,  1224. 

*  Financial  and  Economic  Annual  of  Japan,  1008,  Appendix,  4. 


568         HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

note  was  cut  into  two  pieces,  left  in  the  hands  of  the  drawer 
and  the  payee,  and  payment  was  made  after  the  genuineness 
of  the  note  had  been  ascertained  by  collating  one  piece  with 
the  other.  As  these  notes  could  be  issued  without  restric- 
tions, the  system  led  to  abuses,  which  were  rectified  in  1905 
by  a  code  of  regulations  for  promissory  notes  and  note  asso- 
ciations. These  regulations  limited  the  issue  of  such  notes 
to  regularly  organized  associations,  which  were  made  arbiters 
of  their  genuineness.  These  regulations  were  modified  in 
November,  1906,  so  as  to  permit  the  use  of  checks  and  bills 
of  exchange  and  to  modernize  the  form  of  the  note.  The 
Seoul  Note  Association,  which  was  formed  in  January,  1906, 
contained  in  1908  230  members  and  had  issued  up  to  the 
close  of  February  2,355,092  yen  ($1,177,500)  in  notes,  of 
which  433,850  3*en  were  outstanding.  Five  similar  associa- 
tions in  other  cities  brought  up  the  total  issue  to  5,380,046 
yen  ($2,690,000),  of  which  4,404,006  yen  had  been  paid  off 
and  976,040  yen  were  still  outstanding.1 

The  actual  currency  circulation  of  Korea  is  furnished  by 
the  First  Bank  of  Japan  under  an  Imperial  ordinance  of 
March,  1905.  This  bank  is  one  of  the  largest  of  the  joint- 
stock  banks  which  survived  the  reorganization  of  the  Japa- 
nese monetary  system.  The  bank  has  no  authority  to  issue 
notes  in  Japan,  and  its  circulation  in  Korea  is  covered  partly 
by  specie  and  partly  by  securities.  The  highest  denomina- 
tion of  notes  is  ten  yen  ($4.98),  and  the  lowest  ten  sen  (five 
cents).  The  amount  was  increased  after  the  full  inaugura- 
tion of  the  gold  standard,  rising  from  3,371,817  yen  at  the 
close  of  1904  to  9,224,400  yen  in  1906  and  12,465,300  yen 
($6,232,500)  in  1907.  The  reserve  at  the  close  of  February, 
1908,  consisted  of  3,816,212  yen  in  specie  and  6,779,288  yen 
in  securities.2 


1  Financial  and  Economic  Annual  of  Japan,  1908,  Appendix,  8. 

2  Ibid.,  5. 


CHAPTER  XXI. 

BANKING  AND  EXCHANGE  IN  THE  ORIENT. 

Difficulties  in  Exchange  in  Silver  Countries  Caused  by  Fluctuations 
in  the  Gold  Value  of  Silver— Relief  Sought  by  Adoption  of  the 
Gold-Exchange  Standard — Successful  Evolution  of  the  Plan  in 
Java — The  More  Difficult  Problem  in  British  India — Suspension 
of  the  Rupee  Coinage  in  1893 — Success  of  the  Policy  of  1898 — 
The  Indian  Banks— The  Gold- Exchange  Standard  in  the  Philip- 
pine Islands — The  Exchange  Problem  in  Hong-kong  and  the 
Straits,  China,  Si  am,  and  French  Indo-China. 

THE  conditions  of  banking  in  the  Orient  were  dominated 
for  more  than  a  generation  by  the  fluctuations  in  the 
gold  value  of  silver  and  by  the  importance  which  this 
fact  gave  to  exchange  relations  with  gold  countries.  The 
most  important  banks  derived  their  profit  for  many  years 
from  these  fluctuations  in  rates  of  exchange  rather  than  from 
commercial  discounts.  Their  interests  ran  counter  to  some 
extent  to  those  of  the  business  community,  whose  operations 
in  the  import  and  export  trade  were  constantly  exposed  to 
hazard  by  the  uncertainty  as  to  what  would  be  the  gold 
value  of  silver  obtained  for  imports  from  gold  countries  and 
what  would  be  the  silver  value  of  gold  obtained  for  exports 
to  gold  countries.  The  almost  uninterrupted  fall  in  the  gold 
value  of  silver  from  1873  to  1903  not  only  caused  many  diffi- 
culties in  trade,  but  tended  gradually  to  check  investments 
of  capital  from  the  wealthy  gold  countries. 1 


1  This  subject  is  more  fully  discussed  in  the  author's  Principles  of 
Money  and  Banking,  under  "The  Dislocation  of  the  Exchanges,"  I., 
339.  seq. 

569 


5/0         HISTORY  OF  MODERN  BAKKS  OF  ISSUE. 

This  evil  of  the  dislocation  of  the  exchanges  was  recog- 
nized by  the  English  Gold  and  Silver  Commission  in  1888, 
when  silver  had  already  fallen  in  gold  value  from  an  average 
°f  59i\  pence  in  1873  to  42^  pence  in  1888.  The  disadvan- 
tages resulting  from  these  conditions  led  to  a  series  of  meas- 
ures by  the  Caucasian  governments  having  interests  in  the 
Orient  which  largely  corrected  the  evils  of  fluctuating  ex- 
change and  wrote  a  new  chapter  in  the  history  of  monetary 
science.  The  Dutch  in  Java  were  the  first  to  put  in  opera- 
tion in  1875  a  system  for  ensuring  stability  of  exchange  with 
Europe.  The  British  attacked  the  much  greater  problem  of 
giving  stability  to  the  mass  of  hundreds  of  millions  of  silver 
coins  in  India,  first  in  1893  an(i  finally  more  completely  in 
1899.  The  United  States  attacked  the  same  problem  in  the 
Philippines  in  1901  and  solved  it  in  1903  by  a  measure  which 
represented  the  most  advanced  development  of  what  came  to 
be  known  as  the  gold -exchange  standard.  The  Philippine 
experiment  became  a  model  for  Mexico  in  1904  and  Panama 
in  the  same  year,  and  was  partly  followed  by  the  British  in 
the  Straits  Settlements  and  by  the  French  in  Indo-China. 

The  fundamental  principle  of  the  gold-exchange  standard 
is  the  maintenance  of  silver  coins  at  parity  with  gold,  with- 
out reference  to  their  bullion  value,  by  restriction  of  the 
quantity  to  the  requirements  of  local  trade  and  by  the  sale  of 
bills  of  exchange  at  legal  gold  parity,  plus  such  legitimate 
charges  for  exchange  as  prevail  between  gold  countries. 
This  is  practically  what  was  accomplished,  with  some  varia- 
tions of  detail,  in  most  of  the  silver-using  countries  of  the 
Orient,  except  China,  between  1897  an(^  1906.  The  earlier 
experiment  in  Java,  although  eminently  successful,  was  not 
at  first  adopted  as  a  guide  in  other  countries  because  of  the 
limited  area  in  which  it  was  tried  and  the  process  of  evolu- 
tion by  which  it  grew  up. 

The  Bank  of  Java. 

The  bank-note  circulation  of  the  Dutch  East  Indies,  of 
which  the  Island  of  Java  forms  the  most  important  part,  is 


BANKING  AND  EXCHANGE  IN   THE   ORIENT.     5/1 

furnished  by  the  Bank  of  Java.  The  bank  was  founded  in 
1828,  with  a  capital  of  6,000,000  florins  ($2,400,000),  but 
the  chief  interest  of  its  history  to  the  Western  World  is  the 
success  with  which  it  has  maintained  the  gold  standard  in 
Java  since  the  suspension  of  free  coinage  in  Holland  in  1875. 
The  situation  in  Java  has  been  in  many  respects  the  same 
as  in  the  mother  country,  but  the  experiment  is  one  which 
might  have  seemed  more  precarious  because  of  the  situation 
of  Java  in  the  midst  of  silver  standard  countries  and  the 
almost  entire  absence  of  gold  in  the  reserves  of  the  bank. 
Silver  was  for  many  years  the  legal  standard  of  Java,  but 
the  government  of  Dutch  India  continued  for  a  considerable 
time,  beginning  in  1818,  to  make  the  bulk  of  its  payments 
in  copper.  This  resulted  in  driving  silver  from  circulation 
and  led  to  the  introduction  of  paper  currency  to  represent 
the  copper  coins. '  In  1875  the  Bank  of  Java  was  empowered 
to  regulate  its  operations  according  to  the  principles  on 
which  the  Bank  of  Holland  was  working.  A  bill  was 
brought  forward  and  passed  in  1877,  by  the  Dutch  Ministry, 
for  the  regulation  of  the  currency  of  their  Indian  possessions. 
The  principal  features  of  this  bill  were  the  establishment  of 
the  double  standard  on  the  same  basis  as  in  Holland, — the 
formal  suspension  of  the  further  coinage  of  silver. 

The  parity  of  the  notes  of  the  Bank  of  Java  and  of  the 
silver  coins  is  maintained  through  the  foreign  exchanges. 
All  commercial  operations  with  Holland  or  other  countries 
in  Europe  are  settled  by  bills  drawn  on  Amsterdam  or  Lon- 
don, and  the  exchange  has  shown  an  extreme  fluctuation 
never  greater  than  five  and  a  quarter  per  cent,  on  Amster- 
dam and  six  per  cent,  on  London.  Since  1885  the  fluctua- 
tion has  not  been  greater  than  three  per  cent.  The  bank 
rate  has  varied  from  nine  per  cent,  for  a  time  in  1876  to  as 
low  a  rate  as  four  per  cent,  in  1878  and  in  1886.  The  mean 
rate  in  1906  was  4.5  per  cent.  Settlements  for  merchan- 
dise balances  between  Holland  and  Java  are  made  by  ship- 
ments of  silver.  These  shipments  are  taken  up  at  home  by 
the  Bank  of  the  Netherlands  against  bank-notes  or  credits  at 

1  London   Bankers'  Magazine ',  March,  1893,  I/V.,  383-91. 


5/2         HISTORY  OF  MODERN  BANKS  OF  ISSUE 

par  with  gold.1  There  was  an  industrial  crisis  in  Java  in 
1886,  which  was  attributed  in  some  quarters  to  the  mainte- 
nance of  the  gold  standard  of  wages  and  prices,  but  the 
planters  adopted  improved  methods  of  production  and  recent 
years  have  been  years  of  prosperity. 

From  1 86 1  to  1908  the  highest  course  of  exchange  was 
12.17  florins  and  the  lowest  11.35  florins,  par  being  11.91.' 
The  note  circulation  of  the  bank  was  58,451,000  florins 
($23,380,000)  March  31,  1906,  and  the  metallic  reserve  was 
30,867,000  florins  ($i2,347,ooo).3  The  circulation  was  sub- 
stantially unchanged  in  1908,  but  the  metallic  reserve  had 
risen  to  37,710,299  florins.  Discounts  were  14,317,783  florins. 
The  reserve  is  required  to  be  not  less  than  forty  per  cent,  of 
demand  liabilities,  and  three-fourths  must  be  in  standard 
coins.  The  bank  has  a  monopoly  of  note  issue  in  Nether- 
lands India,  and  its  notes  are  received  at  public  offices  in  the 
absence  of  contrary  instructions  on  the  part  of  the  Governor- 
General,  but  they  are  not  legal  tender  between  individuals.4 

Banking  in  India. 

The  issue  of  circulating  notes  through  the  medium  of 
banks  was  brought  to  an  end  in  India  in  1861,  but  prior  to 
that  date  there  was  a  flourishing  system  of  banks  of  issue. 
Banking  in  India  in  the  early  days  of  European  supremacy 
was  subject  to  no  fixed  regulations.  The  bulk  of  the  busi- 
ness was  transacted  for  many  years  by  the  "  agency  houses," 
founded  by  civil  and  military  employees  who  had  retired 
from  the  active  service  of  the  East  India  Company  to  go  into 
private  business.  They  made  loans  to  the  company  at  a 
high  rate  during  the  latter  part  of  the  last  century,  but  the 
rate  had  fallen  by  1813  to  six  per  cent,  and  the  debt  had 

1  Letter  from  Mr.  Van  den  Berg,  Report  of  the  Indian  Currency 
Committee,  Sen.  Misc.  Doc.  23,  Fifty-third  Cong.,  ist  Sess.,  573. 

*  Economists  Franfais,  July  25,  1908,  130. 

*  Jaarcijfers  Voorhet  Koninkrijk  der  Nederlanden,  Kolonien,  1905, 
82. 

4  Van  den  Berg,  The  Money  Market  and  Paper  Currency  of  Brit- 
ish India,  44. 


BANKING  AND  EXCHANGE  /.V   THE   ORIENT.      573 

risen  to  ^27,000,000.  Some  of  these  houses  became  very 
powerful,  but  large  investments  in  industrial  establishments, 
which  suffered  many  failures  in  1828,  1829,  and  1830,  caused 
their  downfall.  The  total  liabilities  of  the  six  agency  houses 
which  failed  from  1830  to  1834  were  estimated  at  over  ^17,- 
000,000  and  one  of  the  largest  paid  little  more  than  three 
per  cent.1 

The  era  of  responsible  banks  began  after  the  crisis.  The 
Bank  of  Bengal  had  been  founded  as  early  as  1809,  but  its 
charter  was  renewed  in  1840 ;  a  charter  was  issued  in  the 
same  year  to  the  Bank  of  Bombay,  with  a  capital  of  ^525,- 
ooo  ;  and  a  charter  was  issued  in  1842  to  the  Bank  of  Madras. 
The  private  banks  had  been  allowed  to  issue  notes  and  this 
was  true  also  of  the  Union  Bank  of  Calcutta,  founded  in 
1829,  and  the  Bank  of  Agra.  The  Bank  of  Bengal  in  1834 
refused  to  receive  the  notes  of  the  Union  Bank  or  any  of  the 
new  concerns,  and  the  Union  Bank  went  down  in  the  crisis 
of  1846.  The  Bank  of  Western  India  was  founded  in  Bom- 
bay in  1842,  opened  branches  in  Calcutta,  Ceylon,  and 
Canton,  and  became  the  Oriental  Bank  in  1845.  This  bank 
seems  to  have  inaugurated  the  business  of  circuitous  ex- 
change, and  encountered  the  unsuccessful  hostility  of  L,ondon 
houses  and  the  East  India  Company  when  it  sought  a  royal 
charter  in  1850. 

The  discovery  of  gold  in  Australia  led  to  the  projection 
in  lyondon  of  many  new  banks  for  foreign  business,  but  it 
soon  appeared  that  there  was  already  a  sufficient  banking 
capital  invested  in  India.  The  Bank  of  Bombay  found 
legitimate  discount  business  so  dull  that  the  directors  en- 
deavored to  obtain  a  modification  of  their  charter  which 
would  permit  them  to  engage  in  exchange  business  in  and 
out  of  India.  The  directors  proposed,  if  this  were  granted, 
that  the  limit  of  note  issues  should  be  reduced  from  ,£2,000,- 
ooo  to  ;£i, 000,000.  The  actual  circulation  was  only  ,£400,000, 
and  the  government  refused  to  assent  to  the  proposal. 

The  banks  of  the  three  great  presidency  towns  had  a  cir- 

1  J.  W.  MacLellan,  in  London  Banker?  Magazine,  January,  1893, 
LV.,  55- 


574         HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

culation  in  1860  amounting  to  ^2,241,471,  with  current  ac- 
counts of  only  ,£1,855,293.  The  circulation  increased  by  the 
spring  of  1861  to  ,£3,081,599,  of  which  ;£i, 85 1,627  was  issued 
by  the  Bank  of  Bengal,  ,£1,006,460  by  the  Bank  of  Bombay, 
and  ,£223,512  by  the  Bank  of  Madras.  Each  bank  was  re- 
quired to  keep  in  its  vaults  cash  equal  to  one-fourth  of  all 
outstanding  demand  liabilities.  No  complaint  had  been 
made  up  to  this  time  of  the  manner  in  which  these  banks 
conducted  their  business,  but  it  was  thought  that  a  profit 
might  be  made  by  the  government  out  of  the  issue  of  notes. l 
The  proposition  to  take  the  power  of  issue  away  from  the 
banks  was  discussed  as  early  as  April  27,  1859,  in  a  despatch 
from  L,ord  Canning,  and  was  embodied  into  law  in  1861. 
The  record  of  the  banks  was  less  creditable  after  the  loss  of 
the  power  of  note  issue.  The  Bank  of  Bombay,  which  had 
been  so  carefully  conducted  for  twenty  years  that  its  gross 
losses  were  computed  at  only  ,£2,500,  obtained  a  new  char- 
ter in  1863,  sweeping  away  most  of  the  restrictions  on  its 
operations  and  permitting  an  increase  of  the  capital  by  June, 
1864,  to  ,£2, 090,000.  Another  crash  came  in  1866,  follow- 
ing the  news  of  the  failure  of  Overend,  Gurney,  and  Co.,  in 
London,  and  the  Bank  of  Bombay  lost  in  three  years  ,£2,046,- 
898,  and  was  compelled  to  wind  up.'  A  new  Bank  of  Bom- 
bay was  formed,  and  in  May,  1868,  the  liquidator  stated  that 
;£:, 889, 993  of  the  capital  of  the  old  bank  had  been  lost.  The 
great  presidency  banks  are  still  important  factors  in  the  finan- 
cial affairs  of  India  and  usually  hold  in  their  reserves  from 
3,000,000  to  4,000,000  rupees  in  government  notes. 

The  power  to  issue  notes  was  withdrawn  from  the  three 
banks  by  Act  XIX.,  of  1861,  and  a  paper  currency  estab- 
lished under  government  supervision,  upon  substantially 
the  same  basis  as  that  of  the  issue  department  of  the  Bank 
of  England,  if  entirely  separated  from  the  banking  depart- 
ment. Some  changes  were  made  in  the  law  in  1893,  but 
they  were  principally  such  as  were  required  by  the  suspen- 
sion of  the  free  coinage  of  silver.  The  circulation  based 

1  London  Bankers'  Magazine,  April,  1893,  I/V.,  548. 
*  Ibid.,  February,  1893,  LV.,  223-24. 


BANKING  AND  EXCHANGE  IN  THE  ORIENT.      5/5 

upon  securities  was  first  fixed  at  40,000,000  rupees,  which 
was  advanced  by  successive  stages  of  20,000,000  rupees  in 
1882,  1890,  1896,  and  1905,  until  it  stood  on  the  last  date 
at  120,000,000  rupees  (foSjSoo.ooo).1  The  new  notes  were 
to  be  issued  through  "circles  of  issue,"  which  were  at  first 
.established  only  at  Calcutta,  Madras,  and  Bombay,  but  were 
from  time  to  time  increased  in  number.  The  minimum  de- 
nomination, first  fixed  at  ten  rupees,  was  reduced  in  1871  to 
five  rupees.  The  notes  are  legal  tender  within  their  circle 
of  issue  and  are  redeemable  in  rupees.  By  an  act  of  1898 
the  issue  of  currency  notes  on  the  security  of  gold  deposited 
in  England  was  authorized  up  to  July  21,  1900.  This  act 
was  afterwards  extended  and  in  1902  was  made  permanent.2 
The  average  circulation  of  paper  currency  for  the  five 
years  ending  March  31,  1896,  was  282,440,000  rupees;  for 
the  five  years  ending  with  1901,  265,390,000  rupees;  for  the 
five  years  ending  with  1906,  361,800,000  rupees.  The  aver- 
age for  the  year  1905  alone  was  392,000,000  rupees;  for 
1906,  415,200,000;  for  1907,  451,400,000;  and  for  the  eleven 
months  ending  with  February,  1908,  473,600,000  rupees. 
A  considerable  proportion  of  these  notes  is  held  in  Treasury 
offices  and  bank  reserves.  Making  allowance  for  these,  the 
average  in  the  hands  of  the  public  was  for  1905,  306,900,000 
rupees;  for  1906,  328,300,000;  for  1907,  359,200,000;  and 
for  the  eleven  months  ending  February  28,  1908,  366,100,000 
rupees  ($i  19,300,000).  The  maximum  of  the  last  named  year 
was  381,400,000  and  the  minimum  351,700,000  rupees.  Re- 
demptions, including  those  accomplished  by  the  transfer  of 
notes  between  Treasury  branches,  are  much  more  rapid  than 
for  the  paper  money  of  the  United  States,  having  reached 


1  Chalmers  gives  the  credit  of  the  original  act  of  1861  to  James 
Wilson,  then  Financial  Secretary  to  the  Government  of  India,  and 
says  that  it  was  mainly  based  on  the  Imperial  Bank  Acts,  1844-45, 
though  adapted  to  the  conditions  of  British  India  by  making  a  gov- 
ernment department  the  representative  of  the  "Issue  Department" 
of  the    Bank    of    England. — History  of  Currency  in    the  British 
Colonies,  346. 

2  Commercial  and  Financial  Statistics  of  British  India,  1907,  267, 


576         HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

1,002,336,925  rupees  during  1895,  or  more  than  three  times 
the  circulation.  The  new  currency  has  possessed  perfect 
security  and  has  obviated  the  necessity  for  large  transfers  of 
silver  coin,  but  it  has  lacked  the  element  of  elasticity  and 
has  restricted  the  expansion  of  banking  business  in  India. 
The  total  liabilities  of  the  three  banks  which  formerly  issued- 
notes  have  increased  in  no  such  proportions  as  the  liabilities 
of  banks  in  other  countries,  and  interest  rates  in  India  have 
averaged  much  higher  than  in  countries  possessing  a  banking 
currency. 

The  period  of  banking  expansion  throughout  the  world, 
however,  which  began  about  1897  was  not  without  influence 
in  British  India.  The  capital  of  the  three  Presidency  banks 
is  36,000,000  rupees,  but  they  find  strong  competitors  in  the 
exchange  banks  and  other  joint-stock  banks.  The  total 
deposits  of  all  classes  of  banks  on  March  3ist  increased  from 
284,121,180  rupees  for  1896  to  508,957,601  rupees  for  1905, 
of  which  the  share  falling  to  the  Presidency  banks  was 
129,228,296  rupees  for  1896  and  222,636,961  rupees  for  1905. 
The  exchange  banks  had  deposits  on  the  latter  date  of 
170,490,725  rupees  and  other  joint- stock  banks  115,829,915 
rupees.  The  liabilities  of  the  three  Presidency  banks  on 
June  30,  1908,  were  for  the  Bank  of  Bengal,  230,045,086 
rupees  ($75,700,000);  for  the  Bank  of  Bombay,  112,905,756 
rupees  ($36,690,000);  and  for  the  Bank  of  Madras,  63,806,- 
760  rupees  ($20,735,000).  Private  deposits  at  the  Bank  of 
Bombay  were  170,105,245  rupees;  at  the  Bank  of  Bengal, 
79,476,453  rupees;  and  at  the  Bank  of  Madras,  46,907,349 
rupees. ' 

So  considerable  was  the  increase  in  the  funds  held  against 
outstanding  currency  notes,  as  the  result  of  the  deposit  of 
gold  and  rupees  in  the  paper-currency  reserve,  that  the 
Paper-Currency  Act  of  1905  authorized  the  transfer  of  a  part 
of  this  reserve  to  London.  The  result  was  the  remittance 
during  the  fiscal  year  1906  of  ,£7,045,000,  where  the  gold 
was  put  in  the  vaults  of  the  Bank  of  England.  There  was 


Loudon  Bankers'  Magazine,  September,  1908,  LXXXVI.,  395-96. 


BANKING  AND  EXCHANGE  IN  THE  ORIENT, 

some  criticism  of  the  "earmarking,"  or  locking  up  of  so 
much  gold ;  but  it  was  explained  by  the  Indian  Government 
that  the  obligation  to  hold  it  exactly  corresponded  with  the 
gold  held  by  the  Bank  of  England  against  its  note  issue; 
that  it  was  equally  withdrawn  from  the  market,  whether 
held  in  London  or  Calcutta;  and  that  its  purpose  would  not 
be  served  by  an  ordinary  banking  deposit  at  the  Bank  of 
England.1  The  benefit  of  the  change  was  found  largely  in 
Having  the  gold  promptly  available  to  purchase  silver  for 
the  rupee  coinage. 

The  history  of  the  monetary  system  of  British  India  is 
interesting  chiefly  because  of  the  great  experiment  conducted 
there  since  1893  in  maintaining  a  silver  currency  at  par  with 
gold  without  a  gold  circulation.  The  decline  in  the  gold 
value  of  silver,  which  began  to  attain  momentum  in  1866, 
was  keenly  felt  in  India  because  of  her  large  trade  relations 
with  Great  Britain,  the  fact  that  the  receipts  of  the  Indian 
Government  showed  a  steady  shrinkage  in  gold  value,  and 
the  increasing  burden  of  the  charges  on  the  debt,  which 
were  payable  principally  in  gold.  As  early  as  1876  com- 
mercial bodies  in  Bengal  and  Calcutta  urged  upon  the 
government  the  temporary  suspension  of  silver  coinage, 
but  received  the  reply  that  up  to  that  time  there  was  "no 
sufficient  ground  for  interfering  with  the  standard  of  value," 
and  that  if  public  revenue  became  impaired  the  difficulty 
would  be  remedied  by  increasing  taxes  or  reducing  ex- 
penditures.'2 But  exchange  relations  with  Europe  went 
steadily  from  bad  to  worse,  until  at  length  in  1893  a  commis- 
sion headed  by  I/)rd  Herschell  recommended  a  radical  change. 

The  effort  was  made,  as  the  result  of  an  exhaustive  report 
by  the  commission,  to  give  to  the  silver  rupee  a  fixed  gold 
value  of  one  shilling  four  pence,  representing  about  32  cents 
in  United  States  currency,  as  compared  with  a  nominal  value 
of  about  48  cents  when  the  ratio  between  silver  and  gold  was 
15  to  i.  Reliance  was  placed  in  the  first  instance  upon 
the  closing  of  the  mints  to  free  coinage  and  the  offering  of 

1  Indian  Financial  Statement  for  1906-07,  19. 

2  Alglave,  in  Questions  Monetaires  Contemporaines,  605. 


578         HISTORY  Of  MODERN  BANKS  OF  ISSUE. 

Council  bills  in  London,  drawn  upon  the  Indian  Treasury, 
at  about  the  legal  exchange,  subject  to  the  usual  charges 
between  gold  countries. 

The  Currency  Act  of  January  26,  1893,  provided  for  the 
closing  of  the  Indian  mints  to  the  coinage  of  both  gold  and 
silver  on  private  account,  the  government  retaining  the 
power  to  coin  silver  rupees  on  its  own  account.  Arrange- 
ments were  made  at  the  same  time  for  the  receipt  of  gold  at 
the  Indian  mints  in  exchange  for  rupees,  at  16  pence  per 
rupee  ;  for  the  issue  of  currency  notes  in  India  for  gold  coin 
or  bullion  at  the  same  rate,  and  for  the  acceptance  of  British 
sovereigns  and  half  sovereigns  for  government  dues  at  the 
rate  of  15  rupees  to  the  sovereign.  It  was  anticipated  that 
the  closing  of  the  mints  would  in  itself  give  to  the  Indian 
Government  control  of  the  exchange,  by  limiting  the  means 
of  obtaining  currency  in  India  to  the  purchase  of  Council 
bills  offered  by  the  Secretary  of  State  for  India  in  London  ; 
but  this  proved  a  fallacy.  *  While  the  reduction  of  the  stock 
of  currency  in  relation  to  the  growing  demand  of  business 
conditions  in  India  could  not  fail  ultimately  to  raise  its  value, 
it  was  a  process  which  would  require  time  for  its  fulfilment. 

Council  drafts  were  indeed  offered  in  London  at  16  pence, 
but  they  found  no  buyers  and  ultimately  the  government 
was  compelled  to  sell  them  for  what  they  would  fetch.  The 
rate  in  1893  averaged  only  15  pence  and  fell  in  1894  to 
14^  pence  and  in  1895  to  13  pence.  In  the  meantime  the 
entire  cessation  of  coinage  created  severe  stringency  in  Indian 
money  markets,  where  the  minimum  rate  at  the  Bank  of 
Bengal  was  10  per  cent,  in  January,  1898,  and  rose  on  Feb- 
ruary 24th,  to  12  per  cent.  There  was  some  relaxation  in 
these  rates  after  June  16,  1898,  and  the  rate  for  the  busy 


1  Cf.  Probyn.  It  was  not  till  seven  months  after  the  mints  were 
closed  that  the  government  abandoned  the  attempt  to  maintain  ex- 
change at  sixteen  pence,  and  an  eminent  economist  went  so  far  as  to 
make  the  naive  inquiry  whether  they  would  not  "  move  the  rate  of 
exchange  to  the  position  it  held  till  1872,  in  which  year  the  average 
rate  obtained  for  Indian  Council  bills  was  i  shilling  11.125  pence. — 
Irrdian  Coinage  and  Currency,  67. 


BANKING  AND  EXCHANGE  IN   THE  ORIENT.      579 

season  of  1898-99  did  not  exceed  7  per  cent.1  It  became 
evident,  however,  to  the  government,  that  reliance  could  not 
be  placed  entirely  upon  starving  the  circulation  in  order  to 
bring  the  rupee  coinage  up  to  the  legal  parity.  Accordingly 
a  new  commission  was  appointed  in  October,  1898,  which 
made  a  careful  report  on  July  7,  1899,  in  favor  of  taking 
additional  steps  to  ensure  the  equal  value  of  the  rupee 
coinage  with  gold.  The  chief  measure  which  they  recom- 
mended was  that  the  English  sovereign  should  be  made  a 
legal  tender  and  a  current  coin  in  India  and  that  gold  should 
be  freely  coined  at  the  Indian  mints  on  private  account.8 
The  first  part  of  this  programme  was  adopted  by  the 
government. 

But  events  now  began  to  bring  about  what  legislation 
alone  had  proved  insufficient  to  accomplish.  The  rate  for 
Council  bills  in  London,  which  had  improved  only  slightly 
in  1896,  was  14^  pence  in  1897,  an(i  J5i  pence  in  1898. 
While  the  special  commission  was  sitting,  the  rate  moved 
up  to  parity  at  16  pence  and  gold  began  to  be  deposited  for 
rupees  and  currency  notes.  By  March  31,  1899,  the  gold 
which  had  accumulated  in  the  reserve  was  ,£2,035,448  and 
in  another  year  amounted  to  ,£9,291,019  ($45,300,000),  in- 
cluding ;£i, 500,000  deposited  in  London.  From  that  time 
the  success  of  the  project  of  maintaining  a  fixed  exchange 
with  gold  countries  was  assured,  and  as  the  demands  for 
rupee  currency  grew  in  India  the  gold-standard  reserve, 
which  had  been  separated  from  the  currency  reserve,  rose  in 
March,  1906,  to  ^12,262,700  and  in  March,  1908,  to  ;£i8, 355,- 
300.  This  amount  is  exclusive  of  the  currency  reserve,  held 
against  outstanding  paper  notes,  which  contained  in  1906 
,£11,575,400  in  gold  coin  and  bullion.3 

The  gold  standard  was  thus  established  as  firmly  in  India 
as  in  England  or  France,  and  subsequent  events  showed 
that  the  new  system  was  capable  of  enduring  the  shock  of  a 


1  Report  of  the  Indian  Currency  Committee  of  1898,  Commission  on 
International  Exchange,  fooj,  305. 

2  Commission  on  International  Exchange,  1903,  317. 

3  The  Gazette  of  India,  March  21,  1908,  754. 


580        HISTORY  Of  MODERN  BANKS  OF  ISSU&. 

crisis  with  as  little  disturbance  as  the  monetary  and  banking 
systems  of  Europe.  When  currency  is  needed  gold  flows 
into  the  gold-standard  reserve  and  is  employed  in  buying 
silver  for  coinage ;  when  currency  is  not  needed,  exchange 
on  London  is  bought  with  rupees  and  the  rupees  are  thus 
withdrawn  from  circulation.1  A  new  chapter  in  monetary 
science  was  thus  written  by  the  history  of  India.  With  a 
circulation  of  silver  estimated  at  1,800,000,000  rupees  ($603,- 
000,000),  grave  apprehensions  were  felt  in  many  quarters  of 
the  possibility  of  maintaining  such  a  volume  of  currency  at 
par  without  a  large  loan ;  but  the  test  of  experience  showed 
that  those  who  believed  in  the  efficacy  of  an  exchange  fund 
and  in  the  limitation  of  new  coinage  to  the  amount  paid  for 
in  gold,  rested  upon  an  unassailable  principle  of  economic 
science.8  The  Philippines,  Mexico,  and  Panama  were  prompt 
to  follow  in  the  path  thus  marked  out  by  India.3 

It  was  natural  that  an  experiment  so  vast  and  compara- 
tively novel  should  be  conducted  with  deliberation  by  the 
Indian  Government.  One  of  the  most  serious  difficulties  of 
the  plan  up  to  1899  was  the  undue  limitation  in  the  issue 
of  the  silver  rupee,  the  current  money  of  the  country.  From 
1893  to  March  15,  1900,  not  an  ounce  of  silver  was  purchased 
for  coinage  nor  an  additional  rupee  added  to  the  circulation, 
except  those  which  came  out  of  hoards  under  the  stimulus 

1  Robertson  declared  as  long  ago  as  1903  that  "There  is  no  more 
interference  with  the  automatic  character  of  the  currency  in  India 
than  there  is  in  England." — Commission  on  International  Exchange, 

I9°3,  372. 

2  Great  stress  was  laid  by  Sir  James  Westland,  in  criticising  the 
plan  for  an  exchange  fund  in  L,ondon  carefully  worked  out  by  Mr. 
A.  M.  1/indsay,  upon  his  belief  that  the  plan  "  would  involve  the 
undertaking  of  an  indefinite  liability." — Commission  on  International 
Exchange,  1903,  352. 

3  M.  Arnauue  disputes  the  parallelism  sometimes  drawn  between 
the  silver  dollars  of  the  United  States  and  the  five-franc  pieces  of 
France  with  the  Indian  rupee,  upon  the  ground  that  the  American 
and  French  coins  are  part  of  a  circulation  whose  basis  is  actual  gold, 
while  the  rupees  are  not  merely  secondary  coins,   but  constitute  in 
themselves  the  principal  money  of  India.— La  Monnaie,  Le  Credit  et 
le  Change t  162. 


BANKING  AND  EXCHANGE  IN   THE   ORIENT.      581 

of  a  higher  value  in  circulation  than  as  bullion.1  It  was 
gradually  realized  that  this  policy  was  crippling  the  trade 
of  the  country.  Hence  Act  No.  VIII.  of  1900  gave  the 
Secretary  of  State  for  India  power  to  purchase  silver  with 
the  gold  deposited  at  the  mints  and  to  transmit  the  silver  to 
India  for  coinage.  Act  No.  IX.  of  1902  authorized  the  issue 
of  notes  in  India  against  silver  bullion  held  in  England  as  a 
reserve  against  the  notes.  The  acute  need  for  circulation 
was  shown  by  the  purchase  between  March  15,  1900,  and 
April  4,  1901,  of  50,297,224  ounces  of  silver  at  a  total  cost  of 
,£6,055,175,  at  an  average  price  of  28^  pence  per  ounce. 
Purchases  of  silver,  which  were  at  first  made  irregularly, 
began  to  be  made  with  considerable  regularity  in  1904. 
During  the  financial  year  ending  March  31,  1906,  the  amount 
of  silver  purchased  was  ,£8,574,000,  and  the  net  increase  in 
the  rupee  coinage  from  1899  to  1908  was  about  900,000,000 
rupees  ($293,000,000). 

The  reappearance  of  British  India  in  the  market  for  silver 
bullion,  after  having  been  entirely  withdrawn  from  1893  to 
1899,  had  an  influence  upon  the  price  of  silver.  The  down- 
ward course  of  the  metal,  which  prevailed  almost  without 
check  from  1 866,  was  not  reversed  by  the  purchases  of  the 
Indian  Government  in  1900;  but  in  1903  it  was  agreed  with 
the  American  and  Mexican  commissions  on  international  ex- 
change, that  greater  regularity  in  purchases  of  the  metal  was 
"  desirable  and  might  be  adopted  as  far  as  possible  in  each 
country,  subject  to  its  monetary  policy  and  convenience."  2 
If  there  was  any  hesitation  in  adopting  this  policy,  it 

1  Evidence  that  some  coins  were  drawn  from  hoards  is  afforded  by 
the  fact  that  coins  of  old  coinages  constituted  in  1895  a  considerably 
larger  proportion  of  the  amounts  received  at  government  treasuries 
than  in  former  years. — Report  from  the  Head  Commissioner  of  Paper 
Currency,  1805,  39-42. 

2  Commission  on  International  Exchange,  1903,  141.    Subsequently 
Sir  James   Mackay,    Chairman    of  the    British    Commission    which 
adopted  this  resolution,  in  transmitting  figures  of  further  purchases 
to  Mr.  Hanna,  Chairman  of  the  American   Commission,  said  :   "  I 
think  you  will  observe  from  the  prices  which  the  Secretary  of  State 
for  India  paid  for  the  silver  which  he  bought  that  regularity  has,  as 


582         HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

was  removed  by  the  heavy  demands  which  brought  the  In- 
dian Government  into  the  silver  market  in  the  next  few 
years,  and  taxed  the  capacity  of  the  mints.  It  was  found 
advisable  in  1905  to  make  an  estimate  of  probable  require- 
ments at  the  beginning  of  each  quarter,  ' '  and  to  spread  both 
purchase  and  coining  as  far  as  possible  over  the  whole  twelve 
months. ' '  l  Already  it  had  been  found  necessary  in  the  pre- 
vious year  to  accumulate  silver  bullion  in  an  ingot  reserve, 
in  order  to  have  it  immediately  available  for  coinage.  This 
stock  of  ingots  became  so  important  an  element  in  the 
paper-currency  reserve  that  a  new  step  was  taken  in 
1906,  in  transferring  the  ingot  reserve  to  the  gold- reserve 
fund  and  changing  the  name  of  the  latter  to  Gold-Standard 
Reserve. 

The  change  of  name  in  the  reserve  fund  was  significant  of 
the  fact  that  the  new  system  was  so  firmly  established  that 
the  Indian  Government  considered  it  no  longer  necessary  to 
keep  the  fund  entirely  in  physical  gold.  The  menace  to  the 
fund  came  no  longer  from  the  demand  for  gold,  but  from  the 
demand  for  silver  rupees.  Hence  the  conclusions  thus  ex- 
pressed in  the  spring  of  1907 ": 

The  primary  object  of  the  fund,  now  as  formerly,  is  the  effective 
maintenance  of  the  gold  standard,  and  its  protection  against  what- 
ever dangers  may  assail  it.  For  this  purpose  it  must  always  contain 
a  large  stock  of  gold  or  gold  securities  in  a  readily  convertible  form, 
on  which  we  could  draw  in  the  event  of  the  balance  of  trade  turning 
against  India  and  the  Secretary  of  State  being  temporarily  unable 
to  find  a  market  for  his  Council  bills  without  forcing  down  exchange. 
Hitherto,  however,  this  danger  has  not  actually  presented  itself, 
whereas,  on  the  other  hand,  we  have  more  than  once  been  confronted 
with  a  temporary  deficiency  in  our  stock  of  rupees  and  with  a  diffi- 
culty in  procuring  new  ones  with  sufficient  promptitude.  It  is  equally 
legitimate  to  employ  the  reserve,  by  whatever  name  it  be  called,  to 
provide  against  this  danger  also. 


far  as  possible,  been  observed,  so  as  to  prevent  exchange  fluctuations." 
— Commission  on  International  Exchange,  1904,  497. 

1  Indian  Financial  Statement  for  1906-07, 17. 

*  Ibid.,  25. 


BANKING  AND  EXCHANGE  IN   THE   ORIENT.      583 

As  gold  was  always  available  in  considerable  amounts  in 
the  paper-currency  reserve,  it  was  deemed  prudent  to  put 
nearly  the  whole  of  the  gold-standard  reserve  into  securities, 
which  in  March,  1908,  made  up  £14,019,700  of  a  total  reserve 
of  £18,355,300  ($89,500,000),  the  remainder  consisting  chiefly 
of  rupees.  The  profit  on  new  coinage  credited  during  the  pre- 
vious year  was  ,£1,127,000  and  from  interest  on  investments 

/38M00.1 

It  remained  to  put  to  the  test  the  capacity  of  the  exchange 
standard  to  meet  the  conditions  of  a  crisis.  The  opportunity 
for  such  a  test  came  in  1907.  The  low  price  of  jute  had  al- 
ready affected  the  sale  of  Council  bills  in  London  before  the 
crash  came  in  New  York  in  October.  In  September  came  an 
additional  menace  in  the  failure  of  a  part  of  the  wheat  crop, 
which  promised  to  reduce  wheat  exports  to  insignificance  and 
prevent  the  usual  creation  of  credits  in  favor  of  India.  When 
America  early  in  November  "fell  upon  the  world's  supply 
of  gold  with  all  the  insistence  of  panic,"  and  the  discount 
rate  at  the  Bank  of  England  was  put  up  to  seven  per  cent. , 
the  sale  of  Council  bills  became  for  the  moment  impossible 
and  it  was  necessary  to  look  about  for  other  means  of  meet- 
ing demands  upon  the  Indian  Government  in  London.  Ex- 
change fell  as  low  as  15!!  pence,  or  a  discount  of  nearly  two 
per  cent.2 

It  was  not  the  local  needs  of  India  which  led  at  this  time 
to  pressure  upon  the  exchange  funds,  but  the  discovery  in 
London  that  India  had  a  gold  stock  which  might  be  laid 
under  contribution  for  the  needs  of  the  harassed  Western 
world.  Inquiries  were  made  whether  sovereigns  would  be 
paid  for  rupees  in  India  at  the  legal  parity,  with  the  avowed 
object  of  shipping  the  gold.  After  deliberation,  the  govern- 
ment declined  to  furnish  gold  at  par  in  larger  amounts  than 
,£10,000  to  any  individual  on  any  one  day.  On  November 
25,  1907,  however,  the  government  released  ,£1,000,000  of  its 
gold  held  in  London,  and  in  December  £1,500,000  more.  It 
was  also  decided,  after  exchange  recovered,  that  if  it  again 

1  Supplement  to  the  Gazette  of  India,  March  21,  1908,  754. 
8  Ibid.,  709. 


584         HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

fell  below  the  gold  export  point,  telegraphic  transfers  on  Lon- 
don should  be  offered  at  a  fixed  rate. '  No  occasion  arose  at 
the  time  for  putting  this  decision  in  practice.  The  release  of 
gold  in  London  was  accompanied  by  a  quick  rise  in  rates  for 
bills,  which  on  November  3oth  stood  at  15 1|  pence. 

The  general  crisis  was  only  a  few  months  passed  when,  in 
April,  1908,  a  crisis  largely  local  to  India  developed  from  the 
failure  of  the  crops  and  the  excess  of  obligations  abroad  in- 
curred by  Indian  merchants  for  their  purchases  in  Europe. 
Again  sterling  drafts  on  London  were  offered  freely  by  the 
Indian  Government,  and  from  March  26th  to  August  i3th  had 
been  taken  to  the  amount  of  ,£8,058,000.  This  extraordinary 
reversal  of  the  usual  movement  of  exchange  was  met  by  the 
sale  of  securities  held  in  the  Gold-Standard  Reserve  in  London 
in  order  to  find  the  gold  to  meet  the  drafts.  Between  March  3 1 
and  July  31,  1908,  the  amount  invested  in  gold  securities  fell 
from  ^14,019,676  to  ,£9,415,708,  and  silver  held  in  the  reserve 
fund  in  India  mounted  upward  from  ^4, 000,000  to  ^9,002,- 
ooo. a  Thus,  the  fund,  from  consisting  of  gold  investments 
in  the  proportion  of  more  than  seventy-five  per  cent,  came  to 
consist  of  silver  in  the  proportion  of  nearly  fifty  per  cent. 

The  situation  for  the  time  was  threatening,  but  the  tide 
turned  with  the  more  favorable  crop  conditions  of  the  sum- 
mer of  1908.  Jute  and  tea  bills  came  forward  freely,  imports 
into  India  were  reduced,  and  the  silver  coin  in  the  gold 
standard  reserve  again  began  to  be  in  demand;  but  purchases 
of  bullion  for  new  coinage  were  necessarily  suspended  for 
some  time,  with  a  depressing  effect  upon  the  market  for  silver. 
A  special  commission,  appointed  in  1913  to  inquire  into  the 
management  of  Indian  finances,  made  a  final  report  on 
March  6,  1914.  This  report  was  favorable  to  the  general 
scope  and  operation  of  the  Indian  currency  system.  It  was 
recommended  that  the  gold  holdings  in  the  gold  standard 
reserve  should  be  raised  as  soon  as  possible  to  ^15,000,000 
and  that  in  future  the  proportion  of  gold  held  should  be  not 
less  than  one-half.  It  was  recommended  that  gold  held  in 

x  Supplement  to  the  Gazette  of  India,  March  21,  1908,  710. 
3  Ivondon  Bankers'  Magazine,  October,  1908,  IvXXXVI.,  440. 


BANKING  AND  EXCHANGE  IN  THE  ORIENT.       585 

the  paper  currency  reserve  should  be  exchanged  for  silver  in 
the  gold  standard  reserve,  and  that  the  amount  of  paper  cur- 
rency based  upon  securities  should  be  increased.  It  was  also 
recommended  that  any  future  profits  derived  from  the  coinage 
of  rupees,  together  with  the  profits  on  the  sale  of  council 
bills  and  transfers,  should  go  into  the  gold  standard  reserve. 
The  recommendations  in  this  respect  were  intended  to  termi- 
nate the  practice,  adopted  in  1907,  of  diverting  half  of  the 
profits  to  the  funds  available  for  railway  construction.1 

Banking  and  Coinage  System  of  the  Philippines. 

The  Philippine  Islands  under  Spanish  authority  had  a 
bank  of  issue  known  as  the  Spanish- Filipino  Bank  (Banco 
Espanol  Filipino),  originally  chartered  in  1851  with  a  capital 
of  400,000  pesos.  This  capital  was  increased  from  time  to 
time  until  by  the  revision  of  the  bank  statutes  in  1897  it  was 
fixed  at  an  authorized  maximum  of  4,500,000  pesos,  but  this 
authority  was  availed  of  only  to  the  amount  of  1,500,000 
pesos.  The  bank  was  authorized  by  the  same  decree  to 
issue  notes  to  three  times  the  amount  of  its  capital,  but  never 
reached  this  amount.  Its  organization  was  substantially 
that  of  a  state  bank,  like  the  Bank  of  France  and  the  Bank 
of  Spain.  The  governor  of  the  bank  was  appointed  by  the 
Governor- General  of  the  Islands  and  representatives  of  the 
government  participated  in  its  affairs.  By  the  decree  of 
October  17,  1854,  which  first  gave  the  bank  distinctive  official 
recognition,  the  right  to  issue  notes  in  the  Philippine  Islands, 
payable  to  bearer,  was  made  exclusive.  The  bank  was  sub- 
ject, however,  to  the  provisions  of  the  commercial  code, 
that  banks  should  keep  in  cash  in  their  vaults  at  least  one- 
fourth  of  their  deposits  and  note  issues. 

The  standard  of  the  Philippine  Islands  was  gold,  until 
the  depreciation  of  silver  expelled  gold  from  circulation  and 
brought  into  operation  the  silver  standard.  The  currency 
used  from  the  beginning  was  principally  Mexican  silver 
dollars,  which  originally  came  to  the  Philippines  as  the 


Bankers'  Magazine,  April,  1914,  XCVIL,  591. 


586         HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

result  of  the  curious  political  arrangement  of  the  seventeenth 
century,  by  which  the  Islands  were  made  a  dependency  of 
the  Spanish  establishment  in  Mexico.  Through  the  gate- 
way of  the  Philippines  in  part,  Mexican  dollars  found  their 
way  throughout  the  Orient,  so  that  until  the  adoption  of  the 
gold  standard  in  Japan  in  1897,  tne  Islands  enjoyed  a  com- 
mon currency  with  China,  Japan,  and  the  English  and 
French  dependencies  in  the  East.  At  the  time  of  the  re- 
vision of  the  bank  charter  in  1897,  tne  Spanish  Government 
coined  for  use  in  the  Philippines  new  silver  pesos  bearing 
Spanish  inscriptions  and  of  considerably  lighter  weight  than 
the  Mexican  coins,  but  the  two  circulated  practically  side 
by  side  at  par  and  the  Mexican  coins  remained  the  standard. ' 
At  the  time  of  the  American  occupation  of  the  Islands  in 
1898,  and  especially  after  the  restoration  of  civil  government 
in  July,  1901,  currency  and  banking  conditions  were  much 
confused,  owing  to  the  fact  that  the  silver  had  declined  to 
about  one-half  its  nominal  value  in  gold  at  the  old  coinage 
ratio  and  that  much  American  money  had  been  introduced 
into  Manila  and  other  centres  of  population  by  American 
troops  and  officials.  For  a  time,  and  down  to  the  campaign 
of  the  Western  powers  to  rescue  their  legations  at  Peking, 
in  1900,  the  American  Government  was  able  to  maintain 
approximately  a  ratio  of  value  of  two  Mexican  dollars  (or 
pesos)  for  one  American  dollar.  This  ratio  broke  down  to  a 
large  extent,  because  the  presence  of  the  allied  armies  caused 
such  a  demand  for  currency  in  China  that  the  value  of 
Mexican  dollars  rose.  In  less  than  three  months,  in  the 
autumn  of  1900,  more  than  3,000,000  pesos  were  exported 
from  the  Philippines,  and  the  city  of  Manila  and  other 
commercial  places  were  almost  denuded  of  currency.2  The 
American  Government  sought  to  check  the  outflow  by  pro- 


1  These  local  coins  were  of  the  weight  of  a  Spanish  piece  of  five 
pesetas,  but  of  the  fineness  of  0.835.  For  a  more  minute  account  of 
changes  in  coinage  policy  under  Spanish  rule,  see  Report  of  the 
Philippine  Commission,  January  31,  1900,  Sen.  Doc.  138,  56th  Cong., 
ist  session,  I.,  142-48. 

*  De"tieux,  La  Question  Monttaire  en  Indo-Chine,  261. 


BANKING  AND  EXCHANGE  IN   THE   ORIENT.      $8/ 

hibiting  exportation,  but  as  American  money  declined  to 
$i  .95  in  Mexican  a  new  element  of  disturbance  arose  in  the 
fear  of  the  natives  that  it  might  continue  to  fall.1 

The  result  of  these  conditions  was  a  special  investigation, 
under  authority  of  the  War  Department,  which  resulted 
ultimately  in  the  Act  of  March  2,  1903,  establishing  a  gold- 
exchange  standard  in  the  Philippines.8 

The  principle  of  the  gold-exchange  standard  as  adopted 
in  the  Philippines  was  not  unlike  that  of  the  system  of  British 
India  after  the  changes  of  1898,  but  in  the  Philippines  con- 
ditions were  much  easier  to  control  and  the  system  was  given 
a  more  definite  and  permanent  form.  When  the  amount  of 
silver  circulation  becomes  redundant,  the  redundancy  is  re- 
lieved by  the  sale  on  the  part  of  the  Treasury  of  drafts  on 
gold  deposits  in  New  York,  at  rates  only  slightly  in  excess 
of  the  usual  rates  of  exchange.  This  enables  the  holder  of 
the  coins  to  know  that  he  can  lay  down  their  equivalent  in 
gold  in  a  foreign  country,  with  only  the  usual  charges  for 
exchange,  in  substantially  the  same  manner  as  he  could 
export  gold  if  gold  were  actually  in  circulation.3 

The  new  system  was  introduced  into  the  Philippines  by 
the  autumn  of  1903,  but  the  old  coins  were  not  entirely 
eliminated  from  circulation  until  an  act  had  been  passed  by 
the  Philippine  Commission,  imposing  taxes  on  contracts  and 

1  Details  of  these  difficulties  may  be  found  in  Report  of  the  Toft 
Philippine  Commission,  January  25,  1901,  I.,  85-92. 

2  The  author  of  the  present  work  was  designated  by  the  Secretary 
of  War  to  make  this  report  and  concurred  substantially  with  the 
views  of  the  Philippine  Commission,  that  a  gold-exchange  standard 
should  be  established.     There  was  division  of  opinion  on  the  subject 
in  Congress  at  the  first  session,  in  1902,  at  which  the  report  was  sub- 
mitted, which   delayed   action    until    the    following   session.      See 
Special  Report  on  Coinage  and  Banking  in  the  Philippine  Islands,  to 
the  Secretary  of  War,  by  Charles  A.  Conant,  Washington,  1901. 

3  M.  De"tieux  foresees  a  possible  danger  in  this  system,  arising  from 
an  "unfavorable"  balance  of  trade,  which  he  believes  would  bring 
the  local  currency  to  the  Treasury  to  buy  foreign  drafts  because  there 
was  an  insufficiency  of  offerings  of  commercial  bills  and  might  thereby 
impose  a  serious  strain  upon  gold  reserves. — La  Question  Monetaire 
en  Indo-Chine,  281-83. 


588         HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

on  bank  deposits  expressed  in  the  old  currency.1  The  pur- 
pose of  this  legislation  was  to  overcome  the  effects  of  Gres- 
ham's  law,  under  which  persons  having  debts  to  pay  or 
purchases  to  make  would  give  their  preference  to  the  old 
currency,  because  it  was  cheaper  than  the  new  in  gold.  The 
new  legislation  so  effectively  accomplished  its  purpose  that 
Mexican  currency  began  gradually  to  leave  the  Islands  con- 
siderably before  the  day  for  the  enforcement  of  the  tax, 
on  October  i,  1904,  and  by  that  date  had  practically  dis- 
appeared. 2 

The  unit  adopted  by  Congress  for  the  Philippines  was  the 
silver  peso,  containing  416  grains  of  silver  nine-tenths  fine, 
which  was  approximately  the  equivalent  of  the  Mexican 
silver  peso.  This  was  a  larger  amount  of  silver  than  was 
recommended  originally,  as  it  was  desired  to  leave  a  con- 
siderable margin  between  the  bullion  value  of  the  silver  and 
its  face  value,  in  order  to  allow  for  fluctuations  in  the  gold 
price  of  the  metal.  Silver  bullion  advanced  so  rapidly  in 
price,  however,  after  the  efforts  of  the  Commission  on  Inter- 
national Exchange  in  1903  to  bring  about  concurrent  action 
of  European  governments  in  regard  to  their  Eastern  depen- 
dencies, that  the  Philippine  peso  became  more  valuable  as 
bullion  than  its  face  value.  The  result  was  to  cause  some 
exportation  of  the  coin,  which  was  checked  by  an  act  of  the 
Philippine  Commission  prohibiting  such  exportatious.  Sub- 
sequently an  Act  of  Congress  of  July  23,  1906,  authorized 
a  reduction  in  the  amount  of  silver  contained  in  the  peso  and 
the  commission  provided  for  a  coin  containing  20  grams  of 


1  Act   1045    of  the    Philippine   Commission,   enacted  January  22, 
1904.— Report  of  the  Commission  on  International  Exchange,  1904, 
308. 

2  The  adoption  of  a  legal  coinage  on  a  gold  basis  contributed  to 
check  speculation  in  different  varieties  of  coins  as  well  as  fluctuations 
in  the  value  of  silver  bullion.     It  was  declared  by  Judge  Ide,  Decem- 
ber  i,   1905,    that  "all  business  transactions   are  in   the  new,  the 
speculating  and  gambling  in  coin  which  formerly  prevailed   to  so 
large  a  degree  being  entirely  done  away  with." — Fourth  Annual 
Report  of  the  Secretary  of  Finance  and  Justice ,  18. 


BANKING  AND  EXCHANGE  IN  THE  ORIENT.    589 

silver,  eight-tenths  fine.1  This  brought  down  the  ratio  be- 
tween gold  and  the  silver  coin  to  about  22  to  i,  or  within 
the  limits  of  the  ratio  of  British  India  and  Japan,  so  that  if 
silver  should  rise  materially  in  price  it  would  encounter  the 
bulwark  of  the  great  mass  of  silver  in  circulation  in  India 
before  it  would  be  able  to  go  higher  than  the  Philippine  ratio. 

In  order  to  obviate  the  handling  of  money,  certificates  of 
deposit  were  authorized  against  the  new  silver  coins,  which 
were  at  first  limited  in  denominations  to  one,  two,  and  five 
pesos.  Subsequently  larger  denominations  were  authorized 
up  to  500  pesos,  and  in  1906  a  further  change  was  made — 
partly  due  to  the  rise  in  silver — by  which  gold  might  be  held 
against  the  certificates  to  the  amount  of  60  per  cent,  of  the 
total  metallic  fund.  This  required  a  change  in  the  language 
of  the  certificates.  The  popularity  of  this  paper  circulation 
is  attested  by  the  fact  that  during  the  fiscal  year  1907  cer- 
tificates were  shipped  from  the  Bureau  of  Engraving  and 
Printing  to  the  amount  of  27,000,000  pesos,  and  most  of  them 
were  promptly  demanded  in  circulation.  The  total  silver 
coinage  up  to  this  time  was  about  40,000,000  pesos. 

No  general  banking  law  was  adopted  by  the  American 
Government  for  the  Philippines,  except  some  provisions  for 
inspection  and  reports,  down  to  the  summer  of  1907.  At 
that  time  a  comprehensive  revision  was  made  of  the  statutes 
of  the  Spanish-Filipino  Bank  which  put  an  end  to  some 
vexatious  controversies  as  to  the  legal  relations  between  the 
bank  and  the  new  government.  As  the  bank  was  largely 
owned  by  the  Roman  Catholic  Church,  it  was  possible  to 
combine  an  adjustment  of  the  privileges  of  the  bank  with  a 
settlement  of  title  to  certain  lands  and  estates  in  Manila  used 
for  charitable  purposes.  The  charter  of  the  bank  was  ex- 
tended to  January  i,  1928,  and  its  notes  were  made  legal 
tender  for  public  dues  so  long  as  they  were  redeemed  in  full 
in  lawful  money  of  the  Islands.  The  bank  renounced  its 
claim  to  an  exclusive  privilege  of  note  issue,  and  its  issues 
were  limited  for  the  time  being  to  2,400,000  pesos  (§1,200,- 

1  For  weight  and  fineness  of  the  new  coins  in  grains,  see  Finance 
Report,  /po/,  250. 


HISTORY  OF  MODERN  BANKS  Of  JSSUfi. 

ooo)  based  upon  its  capital  and  surplus,  and  600,000  pesos 
based  upon  the  deposit  of  securities  with  the  Treasurer  of  the 
Philippine  Islands.  Power  was  given  to  increase  note  issues 
in  case  of  increase  of  capital  stock,  but  not  in  excess  of 
9,000,000  pesos.  The  notes  based  on  capital  and  surplus 
were  to  be  taxed  at  the  rate  of  one-half  of  one  per  cent,  per 
annum  and  those  based  on  securities  at  the  rate  of  one  per 
cent.1 

The  total  resources  of  the  Spanish-Filipino  Bank  at  Manila 
on  March  31,  1908,  were  9,285,444  pesos  ($4,642,722),  of 
which  3,401,928  pesos  represented  overdrafts  (or  debtor  ac- 
counts), 675,903  pesos  loans  and  discounts,  and  3,401,928 
pesos  cash.  The  outstanding  note  issues  were  1,365,450 
pesos,  and  individual  deposits  1,880,686  pesos.  Capital 
stood  at  3,000,000  pesos  and  surplus  at  900,000  pesos. 

While  the  Spanish-Filipino  Bank  is  the  only  bank  of  issue 
in  the  Philippines,  it  is  overshadowed  in  volume  of  business 
by  the  Manila  branch  of  the  Hong-kong  and  Shanghai 
Banking  Corporation,  who.se  resources  on  March  31,  1908, 
were  13,845,152  pesos  ($6,922,576),  and  by  the  Manila  branch 
of  the  International  Banking  Corporation  with  resources  of 
7,905,593  pesos  ($3,952,796).  The  New  York  office  of  the 
latter  corporation  is  one  of  the  depositaries  of  the  gold- 
reserve  fund  of  the  Philippine  currency  system.2 

Banking  in  Hong-kong  and  the  Straits. 

The  dominating  banking  forces  in  the  East  are  several 
large  banks  financed  by  Knglish  capital,  having  their  real 
domicile  in  London,  but  with  branches  scattered  throughout 


1  Negotiations  for  the  Settlement  of  Title  to  Certain  Lands ;  etc., 
12-14.      The  agreement  was  perfected  on  June  8,  1907,  at  a  dramatic 
meeting  at  the  residence  of  General  Clarence  R.  Edwards,  Chief  of 
the  Insular  Bureau,  in  which  the  present  writer  participated,  as  one 
of  the  advisers  in  regard  to  the  changes  in  the  bank  charter.     Secre- 
tary Taft  and  General  Edwards  were  the  chief  representatives  of  the 
government,  and  Festus  J.  Wade  of  St.  I^ouis  and  Father  J.  R.  Chouza 
of  the  Manila  Cathedral  represented  the  church. 

2  Report  of  the  Comptroller  of  the  Currency,  1907,  415. 


BANKING  AND  EXCHANGE  IN  THE  ORIENT.      $Qt 

the  Orient.  Their  operations  are  not  confined  to  English 
dependencies  alone,  but  extend  to  all  parts  of  China  where 
European  enterprise  has  penetrated,  to  the  Philippine  Islands, 
to  Japan,  and  to  other  countries.  These  banks  are  the 
Hong-kong  and  Shanghai  Banking  Corporation,  the  Char- 
tered Bank  of  India,  Australia,  and  China,  and  the  Mer- 
cantile Bank  of  India.  The  first-named  is  by  far  the  most 
powerful,  and  in  many  matters  the  others  are  content  to 
work  in  harmony  with  its  policy.  The  Mercantile  Bank 
is  less  active  in  China  than  the  Chartered  Bank,  but  is  an 
active  factor  in  the  Straits  Settlements. 

The  Hong-kong  and  Shanghai  Banking  Corporation  was 
established  by  a  local  ordinance  of  the  Hong-kong  Govern- 
ment in  1866,  with  a  capital  of  $2,500,000.  Being  thus  of 
Eastern  origin,  its  accounts  are  stated  in  Mexican  dollars, 
without  regard  to  their  fluctuations  in  English  gold.  Notes 
were  issued  in  Hong-kong,  in  Shanghai,  in  the  Philippine 
Islands,  and  in  the  Straits  Settlements,  but  have  been  grad- 
ually withdrawn  in  the  Philippines  since  the  issue  of  coin 
certificates  by  the  Philippine  Government.  The  share- 
holders of  the  bank  are  subject  to  unlimited  liability  for 
the  note  issues,  but  the  cash  reserve  of  the  bank  may  be 
kept  exclusively  in  Hong-kong  and  a  premium  charged  for 
the  redemption  of  notes  at  any  other  office  than  that  where 
they  are  issued.  The  original  reserve  requirement  was 
specie  to  at  least  one-third  of  the  circulation,  and  the  banks 
other  than  the  Hong-kong  were  required  to  keep  specie  in 
this  proportion  at  each  office  where  notes  were  issued.1  At 
present  the  Hong-kong  Bank  deposits  securities  and  coin 
with  the  Crown  agents  for  the  colonies  and  their  trustees 
to  the  amount  of  $15, 000,000  and  deposits  coin  in  full  with 
the  Hong-kong  Government  for  issues  in  excess  of  this 
amount.3  The  bank  is  allowed  to  issue  notes  of  the  de- 
nomination of  $i  as  a  substitute  for  handling  the  heavy 
silver. 


'  Chalmers,  379. 

2  London  Bankers'  Magazine,  April,  1908,  LXXXV.,  631. 


592         HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

The  capital  of  the  Hong-kong  Bank  has  been  several  times 
increased.  The  last  increase  was  from  $  10,000,000  to  $15,- 
000,000  in  1907.  There  is  a  sterling  reserve  fund,  computed 
at  two  shillings  to  the  dollar,  of  $15,000,000,  and  a  silver 
reserve  fund  of  $13,000,000.  While  the  transactions  of  the 
bank  have  not  increased  rapidly  in  recent  years,  the  assets 
have  reached  the  large  total  of  approximately  $300,000,000. 
Deposits  and  current  accounts,  which  at  the  close  of  1902 
were  $220,692,315,  declined  for  1906  to  $199,209,882,  but 
recovered  on  December  31,  1907,  to  $224,077,166.  Bills 
payable,  including  drafts  on  London,  were  $11,475,783.  The 
assets  on  December  31,  1907,  included  bills  receivable,  $118,- 
006,643;  discounts  and  loans,  $101,598,165;  and  cash,  $40,- 
508, 887. 1  Net  profits,  which  were  computed  at  $3,145,806, 
are  converted  into  payments  to  the  British  shareholders  at  a 
much  lower  rate  in  gold  than  when  silver  was  nearer  the 
old  legal  parity.  The  bank  was  able,  however,  to  declare 
for  1907  a  dividend  of  £2  upon  the  old  shares  and  £i  los. 
upon  the  new  shares,  covering  the  period  for  which  they 
had  been  issued.  The  par  value  of  the  shares  is  $125,  but 
so  large  have  been  the  profits  of  the  bank  that  even  the 
great  depreciation  of  silver  has  not  prevented  their  rise  to  a 
price  of  about  ,£ioo.2 

The  Chartered  Bank  of  India,  Australia,  and  China  in- 
creased its  capital  in  1907  from  ,£800,000  to  ;£i,  200,000,  and 
showed  a  reserve  fund  of  ;£i, 475,000.'  Its  assets  on  Decem- 
ber 31,  1907,  were  £2 1, 075, 23 1,  or  something  over  two-thirds 
those  of  the  Hong-kong  Bank.4  Outstanding  issues  of  notes 
were  ,£659,915;  current  accounts  and  deposits,  .£12,288,731; 
and  bills  payable,  £"1,351,600.  Current  accounts  and  de- 
posits rose  from  .£9,958,344  at  the  close  of  1902  to  ,£13,204,- 


1  London  Bankers'  Magazine,  May,  1908,  LXXXV.,  718. 

2  Ibid.,  May,  1907,  LXXXIII.,  719. 

3  Ibid.,  May,  1908,  LXXXV.,  770. 

4  Since  the  decline  of  silver  to  about  two  shillings  to  the  Mexican 
dollar,  it  is  necessary  to  multiply  sterling  figures  by  ten  in  order  to 
reduce  them  to  dollars  for  comparison  with  those  of  the  Hong-kong 
Bank. 


BANKING  'AND  EXCHANGE  IN  THE  ORIENT.      593 

i 

594  for  1906.  ^Cash  on  hand  at  the  close  of  the  year  was 
^£2,070,231  &!r  1902,  ,£3,063, 173  for  1906,  and  ,£2,761, 781 
for  1907.  Afhe  dividend  declared  for  1902  was  ten  per  cent., 
which  wa£  advanced  for  1904  to  eleven,  for  1905  to  thirteen, 
and  for  ^907  to  fourteen  per  cent.1  The  Mercantile  Bank  of 
India.-had  a  paid-up  capital  at  the  close  of  1907  of  ^"562,500 
and  assets  of  ^6,156,772. 

A^  large  share  of  the  business  of  Oriental  banks  is  based 
on  exchange  with  gold  countries,  especially  with  L,ondon. 
This  business  became  very  profitable  to  the  banks  as  silver 
declined  in  value,  but  a  source  of  embarrassment  and  loss 
to  traders.  Exporters  protected  themselves  in  a  measure 
by  making  * '  forward  ' '  contracts  for  exchange — that  is, 
when  they  knew  that  they  would  have  shipments  to  make, 
for  which  they  would  be  entitled  to  sell  bills  upon  London 
in  sterling,  they  would  contract  in  advance  with  a  banker 
to  accept  .these  bills  at  a  certain  rate  in  silver.  They  would 
then  be  in  a  position  to  determine  the  silver  price  at  which 
they  could  produce  or  buy  the  goods  for  export  at  a  profit. 
If  silver  declined  in  gold  value,  they  were  fully  protected 
by  their  exchange  contract.  The  banks  sought  protection 
by  contracts  for  forward  sales  of  bank  paper  and  by  the 
high  rates  they  charged  for  the  risks  assumed.2 

The  difficulties  of  exchange  became  especially  acute  after 
the  crisis  of  1893  in  tne  Straits  Settlements,  where  the  port 
of  Singapore  constituted  the  entrep6t  of  international  trade. 
The  Governor  of  the  Settlements  was  accordingly  author- 
ized in  1893  by  the  British  Colonial  Secretary  to  appoint  a 
special  committee  to  suggest  remedial  measures.  This  com- 
mittee disagreed  and  nothing  came  of  its  efforts.  The  same 
fate  befell  the  plan  for  a  gold-exchange  standard  adopted 
by  the  Singapore  Chamber  of  Commerce  on  August  25, 
1897.  This  plan,  while  proposing  the  adoption  of  a  new 
silver  dollar  to  have  the  gold  value  of  two  shillings,  had 


1  London  Bankers?  Magazine,  June,  1908,  LXXXV.,  858. 

2  Cj.   Kemmerer,    Political    Science   Quarterly^    December,    1906, 
XXL,  671. 


594        HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

defects  of  detail  which  made  it  impracticable.1  The  criticism 
which  it  aroused  postponed  action  until  1902,  'when  another 
sharp  fall  in  silver  caused  new  derangement  ^to  the  ex- 
changes. A  committee  was  then  appointed  by  the  home 
government,  headed  by  Sir  David  Barbour,  which  Completed 
its  report  in  May,  1903. 

This  committee  recommended  that  a  special  silver  dollar 
be  coined  for  the  Straits,  of  416  grains,  nine-tenths  fine,  w'nich 
should  be  gradually  substituted  for  the  Mexican  and  the 
British  dollar,  which  had  been  formerly  coined.  When  a 
supply  of  the  new  dollars  had  been  received,  the  importation 
of  the  old  coins  and  the  exportation  of  the  new  should  be 
prohibited.  It  was  proposed  that  the  new  dollar  should  be 
raised  by  scarcity  to  a  gold  value  to  be  fixed  at  a  later  date 
and  that  when  this  stage  was  reached  the  new  coins  should 
be  first  given  at  a  fixed  rate  for  gold  and  eventually  that 
gold  should  be  given  for  silver,  so  long  as  gold  was  avail- 
able, or  bills  should  be  given  on  Crown  agents  in  London, 
based  on  the  fixed  rate  of  exchange.2  This  plan  was  adopted 
by  the  Legislative  Council  on  May  29,  1903.  The  new  dollars 
began  to  reach  Singapore  early  in  October  and  were  put  in 
circulation  through  the  banks. 

The  failure  to  prescribe  a  definite  gold  value  to  be  ulti- 
mately attained  by  the  new  coin  led  to  perturbations,  which 
were  perhaps  intensified  by  the  unexpected  rise  of  silver.  It 
had  been  the  general  expectation  that  the  value  of  the  new 
coins  would  be  fixed  ultimately  at  two  shillings,  but  the  rise 
in  silver  made  it  evident  that  such  a  valuation  —  about  four 
per  cent,  below  that  of  the  Philippine  coins  of  similar  weight 
—  would  soon  send  them  to  the  melting  pot.  Hence  began 
a  violent  speculation  in  exchange  for  a  higher  gold  value, 
which  was  terminated  only  when  the  Governor  in  Council 
finally,  on  January  29,  1906,  fixed  the  exchange  value  of 
the  dollar  at  28  pence,  or  at  the  rate  of  $60  for 


1  Cf.     Kemmerer,    Political  Science    Quarterly,    December,   1904, 
XIX.,  638-40. 

2  Commission  on  International  Exchange,  1903,  289. 

3  The  story  of  the  speculative  operations  is  graphically   told   by 


BANKING  AXD  EXCHANGE  IN    THE   ORIENT.      $95 

Notes  based  upon  the  new  coins  were  offered  by  the  gov- 
ernment for  gold,  and  in  September,  1906,  tenders  of  gold 
began  in  considerable  amounts.  The  ordinance  of  January, 
1906,  prescribed  that  the  future  profit  on  the  minting  of 
Straits  dollars  should  be  carried  to  a  separate  gold-reserve 
fund,  and  a  run  for  silver,  in  case  it  rose  above  the  legal 
parity,  was  guarded  against  by  an  ordinance  of  October  22, 
1906,  compelling  the  holder  of  notes  to  accept  gold  at  the 
option  of  the  government  instead  of  silver.  An  order  of 
the  same  date  accepted  the  policy  already  adopted  in  the 
Philippines,  by  authorizing  the  Governor  to  reduce  the  fine- 
ness of  the  silver  coins  from  nine-tenths  to  eight-tenths.1 

In  Hong-kong  the  introduction  of  the  gold  standard  has 
been  much  discussed,  but  generally  upon  the  basis  of  its 
introduction  in  China.  The  unsuccessful  efforts  made  early 
in  the  history  of  the  Colony  to  introduce  the  British  mone- 
tary system,  taught  the  lesson  that  it  was  not  feasible  to 
maintain  a  system  different  from  that  of  the  great  country 
of  which  Hong-kong  was  geographically  a  part.2  Even  the 
effort  to  coin  a  distinctive  British  dollar  was  not  success- 
ful in  1865,  but  the  experiment  which  was  renewed  in  1895, 
when  Mexican  dollars  had  become  scarce  and  the  Indian 
mints  were  idle,  gave  better  results.  By  the  close  of  the 
fiscal  year  1903  the  new  dollars  had  been  coined  to  the 
amount  of  $151,361,594,  and  had  found  their  way  into  all 
parts  of  the  Orient  remaining  on  the  silver  basis,  where 
the  Mexican  dollar  still  circulated.3 

Banking  in  China. 

China  has  been  slow  in  adopting  European  methods  of 
banking,  but  possessed  paper  currency  before  it  was  known 
in  any  other  part  of  the  world.  Silk  rolls  and  cowries  were 

Kemmerer,    Political   Science    Quarterly^    December,    1906,    XXI., 
671-77. 

1  Report  of  the  Director  of  the  (U.S.}  Mint,  1907,  199-201. 

2  Chalmers  recounts  some  of  these  earlier  failures — A  History  of 
Currency  in  the  British  Colonies,  374. 

3  Cf.  Andrew,  Quarterly  Journal  of  Economics,  May,  1904,  XVIII., 
340- 


596        HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

at  one  time  money  in  China,  and  as  late  as  the  year  1206 
A.D.  silk  was  accepted  in  payment  of  the  salt  tax.  The  first 
issues  of  government  paper  are  ascribed  to  the  Kmperor 
Hien-tsung  of  the  Tang  d}aiasty  (A.D.  806-821).  In  view 
of  the  scarcity  of  cash,  this  ruler  issued  an  edict  prohibiting 
the  manufacture  of  copper  utensils  and  providing  for  offices 
in  the  capital  at  which  merchants  might  deposit  their  coin 
and  receive  in  exchange  bonds  or  "flying  money."1  The 
notes  were  soon  issued  at  various  provincial  capitals  and 
were  redeemable  at  the  office  of  issue.  It  was  in  the  State 
of  Shuh,  the  present  Province  of  Szechwan,  that  notes  were 
first  issued  without  a  full  metallic  cover.  Devised  by  Chang 
Yung,  they  were  freely  issued  during  the  reign  of  Chengtsung 
of  the  Sung  dynasty  (A.D.  997-1022)  to  obviate  the  incon- 
venience of  handling  the  iron  money  then  in  use.  They  were 
known  as  changelings,  were  worth  a  tael  of  pure  silver,  and 
were  redeemable  once  in  three  years. 

The  issue  of  irredeemable  paper  to  defray  government 
expenses  began  in  the  twelfth  century  and  soon  ran  the 
usual  course  of  depreciation  and  repudiation.2  Under  the 
Mongol  Government  a  long  series  of  paper  issues  occurred, 
beginning  in  the  first  year  of  Kublai  Khan  (A.D.  1260). 
The  manner  in  which  this  paper  currency  was  employed 
as  a  substitute  for  actual  money  was  a  source  of  admiring 
wonder  to  Marco  Polo  during  his  visit  to  the  Khan's  court. 
The  first  Ming  Kmperor,  Hung-wu  (A.D.  1368-98),  was  com- 
pelled to  continue  paper  issues  for  a  time,  but  eventually 
restored  the  use  of  specie.3  Government  paper  issues  ceased 
from  the  middle  of  next  century  until  1853,  when  two  forms 
of  notes  were  issued  —  those  representing  copper  cash  and 
those  representing  silver.  They  were  forced  into  circula- 
tion by  the  Board  of  Revenue  by  paying  them  to  officials 
as  part  of  their  salaries  and  by  compelling  the  banks  to 
accept  them  as  the  equivalent  of  money.  They  depreciated 

1  Morse,  Currency  in  China,  18. 
*  Morse,  20. 

3  Morse  gives  reproductions  of  some  of  the  notes  used. — Currency 
in  China,  26,  seq. 


BANKING  AND  EXCHANGE  IN   THE   ORIENT.      597 

rapidly  and  in  1861  were  sold  in  the  streets  of  Peking  at  a 
discount  of  ninety-seven  per  cent. 

Private  bank  paper  has  long  been  known  in  China,  and 
the  guild  of  bankers  is  among  the  most  powerful  bodies  of 
citizens  in  the  Empire '  ;  but  this  private  paper  circulates 
only  within  a  short  radius  of  the  place  of  issue  and  is  subject 
to  no  form  of  government  supervision,  except  in  case  of  fail- 
ure. The  government  then  steps  in  and  often  takes  severe 
measures  against  the  defaulters,  extending  in  some  cases  to 
decapitation.  Failures  are  rare,  however,  because  of  the 
co-operation  which  prevails  among  the  Chinese  bankers  and 
the  training  which  is  derived  from  the  hereditary  character 
of  the  business.  The  notes  issued  are  chiefly  cash  notes — 
i.  e.>  payable  in  copper  cash, — but  other  forms  of  money  are 
usually  given  when  requested.  The  notes  are  usually  pay- 
able on  demand,  but  sometimes  only  a  certain  number  of 
days  after  issue.3 

Banking  according  to  European  methods  was  introduced 
gradually  into  China  after  the  opening  of  the  country  to 
European  and  American  trade  in  the  middle  of  the  last 
century.  The  Hong-kong  and  Shanghai  Banking  Corpora- 
tion was  one  of  the  first  to  extend  its  operations  beyond  the 
British  settlements  into  neighboring  Chinese  territory  and 
has  been  followed  by  the  Chartered  Bank  of  India,  Aus- 
tralia, and  China,  the  Bank  of  Indo-China,  the  Yokohama 
Specie  Bank,  the  Russo-Chinese  Bank,  and  the  German- 
Asiatic  Bank.  These  banks  are  not  regulated  to  any  ex- 
tent by  the  Chinese  Imperial  Government,  but  are  all 
institutions  of  large  capital,  with  many  branches,  and  are 
under  the  protection  which  arises  from  the  influence  of  the 
respective  home  governments  of  the  interests  which  control 
them.  They  nearly  all  issue  notes  under  authority  of  their 
home  charters,  which  find  their  chief  circulation  in  the  treaty 
ports,  but  have  filtered  to  some  extent  into  the  interior  of 
China.  They  are  issued  for  the  most  part  in  dollars,  and 
are  redeemable  in  the  coin  which  they  represent — the  old 

1  Cf.  Jenks,  Commission  on  International  Exchange,  1904,  49. 

2  Ibid.,  49-52. 


598         HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

Mexican  dollar  in  Shanghai,  the  British  dollar  in  Canton 
and  Peking.  Some  few  notes  are  redeemable  in  taels.  The 
notes  issued  in  one  city  are  not  universally  received  at  par 
by  the  branches  of  the  issuing  bank  in  other  cities.1 

China's  foreign  trade  has  been  subject,  ever  since  the  fall 
of  silver,  to  excessive  and  violent  fluctuations  in  rates  of 
exchange.  This  fact  has  had  a  marked  influence  both  upon 
mercantile  activity  and  upon  the  character  of  banking. a  The 
foreign  banks  established  in  the  country  are  exchange 
banks,  deriving  the  larger  share  of  their  profits  from  fluc- 
tuations in  the  gold  value  of  silver  and  in  the  changing 
relations  of  supply  and  demand  for  Mexican  dollars  and 
other  coins.  The  effect  of  a  fluctuating  standard  was  to 
make  it  impossible  for  them  to  embark  European  capital 
permanently  in  Chinese  enterprises  or  to  enter  largely  upon 
loans  upon  domestic  transactions.  While  their  capital,  ex- 
pressed in  European  gold  money,  constantly  depreciated  with 
the  fall  of  silver,  their  profits  increased  in  the  case  of  notes, 
deposits,  and  other  obligations  payable  in  silver.  Thus,  their 
notes,  issued  when  silver  had  a  high  gold  value,  became 
"drafts  without  any  fixed  maturity  which  the  bank  was 
able  during  a  long  term  of  years  to  allow  to  liquidate  them- 
selves by  the  fall  in  the  metal  which  it  had  promised  to  pay.  "3 
Out  of  similar  considerations  grew  their  operations  in  ex- 
change with  Europe,  by  which  they  so  efficiently  protected 
themselves  against  the  fall  in  silver  that  their  transactions 
never  failed  in  the  long  run  to  show  a  handsome  net  profit.4 


1  Jenks  declared  that  the  discount  is  sometimes  as  high  as  five  per 
cent. — Commission  on  International  Exchange,  1904,  48. 

2 Jenks  declares  that  the  fluctuation  in  exchange  "has  made  the 
import  and  export  trade  partake  so  much  of  the  nature  of  gambling 
that,  although  some  fortunes  have  been  made,  others  have  been  lost 
through  no  fault  of  the  merchants  concerned." — Commission  on  Inter- 
national Exchange,  1904,  45. 

3  This  definition  is  that  of  Dubois,  in  his  interesting  analysis  of  the 
character  of  the  foreign  banks  in  China  and  the  reasons  why  this 
character  has  been  almost  inevitable. — L' Empire  de  V  Argent,  44. 

4  For  earnings  of  the  Hong-kong  and  Shanghai  and  the  Chartered 
Bank,  see  infra, 


BANKING  AND  EXCHANGE  IN  THE  ORIENT.      599 

In  spite  of  the  success  of  the  foreign  banks,  the  influence 
of  the  fluctuations  in  exchange  upon  trade  became  even 
more  acute  than  formerly  after  Japan  and  Russia  adopted 
the  gold  standard  in  1897  an(^  after  the  sharp  decline  of  silver 
in  1902.  In  the  latter  year  there  was  much  discussion  among 
foreign  residents  in  China  regarding  the  practicability  of 
adopting  a  gold-exchange  standard  on  principles  similar  to 
those  adopted  in  India  and  proposed  for  the  Philippines. 
While  such  a  project  had  many  advocates,  there  was  a  feel- 
ing in  British  official  quarters  that  it  would  be  necessary  to 
first  diffuse  throughout  China  a  uniform  silver  currency  in 
place  of  the  great  variety  of  coins  in  use  before  proceeding  to 
give  to  such  coins  a  definite  and  permanent  gold  value.  Under 
the  influence  of  these  views,  the  commercial  treaty  of  Sep- 
tember 5,  1902,  negotiated  between  the  plenipotentiaries  of 
China  and  Sir  James  Mackay  on  behalf  of  Great  Britain, 
contained  this  article 1 : 

11  ARTICLE  II.  China  agrees  to  take  the  necessary  steps 
to  provide  for  a  uniform  national  coinage  which  shall  be 
legal  tender  for  all  duties,  taxes,  and  other  obligations 
throughout  the  Empire  by  British  as  well  as  Chinese 
subjects." 

In  pursuance  of  these  events,  the  Chinese  Imperial  Gov- 
ernment joined  with  Mexico,  early  in  1903,  in  asking  the 
co-operation  of  the  United  States  in  securing  * '  relative  sta- 
bility of  exchange  between  the  gold  and  silver  countries." 
The  result  was  the  appointment  of  a  Commission  on  Inter- 
national Exchange  by  the  Governments  of  the  United  States 
and  of  Mexico  for  the  purpose  of  conferring  with  repre- 
sentatives of  important  European  powers.2  China  was 
represented  at  these  conferences  by  her  diplomatic  repre- 

1  The  text  of  this  treaty,  with  annexes,  is  given  in  Commission  on 
International  Exchange ',  1903 ,  200-214.     A  similar  clause  was  em- 
bodied in  the  treaty  of  China  with  the  United  States  of  October  8, 
1903,    and  with  Japan. — Commission  on  International  Exchange, 
1903,  215-25. 

2  Vide  instructions  of  Secretary  Hay  to  the  American  Commission, 
Commission  on  International  Exchange,  1903,  46.    For  the  relations 
of  Mexico  to  this  subject,  see  infra ,  487-89. 


600         HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

sentatives  at  the  capitals  where  they  were  held.  The  Amer- 
ican Commission  proposed  the  outlines  of  a  plan  for  China, 
by  which  she  should  provide  for  the  prompt  coinage  of  a 
distinctive  Chinese  silver  coin  to  be  maintained  at  par  with 
a  standard  gold  coin  at  a  ratio  of  about  32  to  i.  The  main- 
tenance of  par  was  to  be  sought  by  the  creation  of  an  ex- 
change fund  in  foreign  financial  centres,  obtained  by  a  special 
loan,  if  necessary,  and  by  the  profits  on  silver  coinage.  Drafts 
were  to  be  sold  in  China  on  this  fund  and  in  other  countries 
on  funds  in  China  at  fixed  rates,  somewhat  above  the  usual 
banking  rates.1 

Upon  the  subject  of  introducing  a  uniform  gold-standard 
system  into  China,  it  was  declared  by  the  American  Com- 
mission:  "There  was  unanimous  agreement  that  such  a 
system  would  be  desirable  and  advantageous,  both  to  China 
and  to  the  gold-standard  countries  which  have  large  com- 
mercial dealings  with  her."  Upon  the  question  whether  the 
gold  standard  should  be  established  from  the  beginning, 
however,  or  should  come  after  a  uniform  national  currency 
had  first  been  established  upon  a  silver  basis,  there  was  some 
difference  of  opinion.  The  German  Commission  came  near- 
est to  complete  accord  with  the  American  plan,  in  the  dec- 
laration that  the  Chinese  Government  should  ' '  take  at  the 
beginning  of  the  reform  all  those  steps  which  would  allow 
her  an  influence  on  the  rate  of  foreign  exchange."  The 
British  resolutions,  which  represented  also  to  a  considerable 
degree  the  attitude  of  the  Russian  Commission,  were  as 
follows 2 : 

"  That  a  national  currency  for  the  Chinese  Empire,  con- 
sisting of  silver  coins  which  shall  be  full  legal  tender  through 
the  Empire,  is  urgently  desirable. 

' '  As  soon  as  practicable,  steps  should  be  taken  for  the 
establishment  in  China  of  a  fixed  relation  between  the  silver 
unit  and  gold." 

A  qualified  moral  support  having  thus  been  obtained  from 

1  Commission  on  International  Exchange,  1903,  51-53. 
9  For  text  of  all  these  resolutions  and  reports,  see  Commission  on 
International  Exchange^  1903^  141-72. 


BACKING  AND  EXCHANGE  IN   THE   ORIENT.     6oi 

leading  powers  for  the  introduction  of  the  monetary  reform 
into  China,  Professor  Jenks  was  sent  to  that  country  as  a 
special  representative  of  the  American  Commission  and  spent 
there  the  greater  part  of  the  year  1904  in  conference  with 
Chinese  officials  and  native  and  foreign  bankers  and  business 
men.  His  report  showed  a  keen  interest  and  warm  sym- 
pathy in  his  mission,  but  revealed  the  practical  difficulties 
which  have  thus  far  prevented  definite  action  by  the  Chinese 
Government.  These  difficulties  were  political  as  much  as 
economic,  arising  chiefly  from  the  lack  of  power  in  the  cen- 
tral government  to  supersede  the  provincial  coinage  and 
currency  systems  established  to  the  profit  of  the  viceroys, 
and  from  the  disinclination  to  employ  foreign  experts  to 
manage  the  new  system  as  derogatory  to  the  national  dignity 
of  China.1 

Notwithstanding  these  difficulties,  the  Chinese  Imperial 
Government  took  several  steps  within  the  next  few  years 
to  bring  order  into  the  monetary  and  banking  system.  In 
November,  1905,  an  Imperial  decree  provided  for  a  uniform 
national  coinage  of  silver,  with  the  Kuping  tael  as  the  unit. 
It  was  proposed  to  deposit  these  coins  with  the  Imperial 
Bank,  which  was  to  issue  notes  against  them,  which  were 
to  be  received  by  the  provincial  treasuries  and  the  railway, 
telegraph,  and  shipping  offices.3  By  degrees  the  use  of  sycee, 
the  old  "shoe  currency,"  was  to  be  abandoned  and  the  old 
silver  was  to  be  received  at  the  mints  for  recoinage.  Action 
under  this  decree  was,  however,  soon  suspended  and  the 
matter  was  reserved  for  further  consideration.3 

The  creation  of  the  Imperial  Bank,  at  about  the  same 
time  as  the  proposed  reform  in  the  coinage,  was  more 
effective.  The  first  efforts,  made  in  1904,  were  not  success- 
ful in  attracting  private  capital.  The  government,  however, 
paid  in  a  small  amount  of  capital,  and  the  bank  opened 


1  Cf.  Jenks,  Commission  on  International  Exchange,  1904,  60-72. 
See  also  the  powerful  report  of  the  Chinese  Minister  to  Russia, 
ibid.,  190-200. 

*  Annual  Report  of  the  Director  of  the  Mint,  1906,  197. 

3  Ibid.,  1907,  214. 


602         HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

branches  in  Peking,  Tientsin,  Hankow,  and  Shanghai.  Mer- 
chants shortly  afterwards  raised  1,000,000  taels,  other 
branches  were  opened  at  important  points,  and  deposits 
began  to  be  received.1  A  further  increase  of  capital  was 
proposed  in  1908,  by  which  the  total  should  be  10,000,000 
Haikwan  taels  ($6,800,000),  of  which  the  government  was 
to  contribute  half.  The  duration  of  the  bank  is  for  thirty 
years  and  it  is  substantially  a  state  institution.  All  of  its 
operations  are  under  the  control  of  the  Board  of  Finance,  it 
is  entrusted  with  the  public  funds,  and  will  make  the  arrange- 
ments for  national  loans.  New  regulations  regarding  the 
issue  of  notes  have  been  promulgated  and  it  is  intended 
ultimately  to  confer  upon  the  bank  exclusive  privileges 
in  this  regard.  A  new  institution  has  also  been  estab- 
lished to  deal  with  the  funds  of  the  Board  of  Posts  and 
Communications.3 

The  limitation  of  the  field  of  the  foreign  banks  substantially 
to  exchange  business  was  departed  from  only  in  the  case  of 
the  Russo- Chinese  Bank,  which  was  granted  a  charter  by  the 
Russian  Government  in  December,  1895,  with  the  avowed 
object  of  "transacting  commercial  operations  in  the  East 
Asiatic  countries."  For  this  purpose  the  bank  was  given 
unlimited  duration  and  was  aided  by  both  the  Russian  and 
Chinese  Governments  by  contributions  towards  its  capital. 
The  open  purpose  of  the  Russian  Government  to  avail  itself 
of  the  influence  of  the  bank  to  promote  closer  political  asso- 
ciation with  China  was  shown  by  the  authority  given  by  the 
charter  to  engage  in  the  collection  of  duties  in  the  Empire 
of  China  and  in  transactions  relating  to  the  State  Treasury  ; 
the  coinage,  with  the  authorization  of  the  Chinese  Govern- 
ment, of  the  country's  money;  payment  of  the  interest  on 
loans  concluded  by  the  Chinese  Government ;  the  acquisition 
of  concessions  for  the  construction  of  railways  within  the 
boundaries  of  China;  and  the  establishment  of  telegraph 
lines.' 


1  Annual  Report  of  the  Director  of  the  Mint,  1907,  218. 
*  U.  S.  Consular  Reports,  June  30,  1908,  8-9. 
3  Charter  of  the  Russo-Chinese  Bank,  1004,  n. 


BANKING  AND  EXCHANGE  IN   THE   ORIENT.      603 

The  capital  of  the  bank  was  originally  fixed  at  6,000,000 
rubles  ($3,090,000),  but  it  was  raised  by  successive  stages 
until  it  stood  on  January  i,  1908,  at  24,088,200  rubles  ($12,- 
405,000),  without  including  reserve  funds  of  9, 1 76,514  rubles. 
The  portion  of  the  capital  subscribed  by  the  Chinese  Govern- 
ment was  5,000,000  Kuping  taels,  which  worked  out  at 
6,658,200  rubles.  The  functions  of  the  bank  included  "  the 
issue  of  bank  notes  in  taels,  dollars,  pounds  sterling,  and  in 
other  currency  of  the  country,  for  an  amount  not  to  exceed 
the  paid-up  capital  and  the  reserves  of  the  bank."  A  cash 
reserve  of  one-third  the  amount  of  notes  outstanding  was 
the  principal  restriction  upon  the  circulation.  The  actual 
circulation  at  the  close  of  1907  was  far  within  the  legal 
limits,  being  only  897,476  rubles  ($462,000).  The  bank 
aided  in  putting  Russian  currency  in  circulation  in  Man- 
churia by  accepting  it  at  reasonable  rates  of  exchange  when 
disbursed  by  Russian  officers  for  supplies.1  The  war  of  1904 
compelled  the  abandonment  of  the  Japanese  branches,  but 
after  the  war  some  of  them  were  re-established.  The  total 
resources  of  the  Russo-Chinese  Bank  on  December  31,  1907, 
were  288,176,151  rubles  ($148,400,000),  of  which  cash  and 
bullion  constituted  15, 222, 327  rubles ;  bills,  73,513,291  rubles; 
loans,  40,784,849  rubles;  obligations  from  correspondents, 
60,856,061  rubles,  and  from  other  branches,  81,427,685 
rubles.8 

The  Yokohama  Specie  Bank  of  Japan,  while  not  authorized 
to  issue  notes  at  home,  was  granted  authority  by  an  ordi- 
nance of  September,  1906,  to  issue  them  in  Kwantung  pro- 
vince and  in  China.8  Notes  based  upon  Japanese  silver  were 
issued  in  Manchuria  after  the  Japanese  invasion  by  the 
Yokohama  Specie  Bank  and  were  still  outstanding  late  in 
1907  to  the  amount  of  1,189,624  yen  ($590,000).* 


1  Dubois,  102. 

2  Directors'  Report  of  June  77, 1008,  furnished  through  the  courtesy 
of  Mr.  Walter  Kutzleb,  New  York  representative  of  the  bank. 

3  Economic  Annual  of  Japan,  1908,  142.     These  notes  were  based 
on  Mexican  dollars. 

4  Annual  Report  of  the  Director  of  the  Mint,  1907,  218. 


604         HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

Banking  in  Siam. 

The  bank-note  circulation  of  Siam  is  provided  largely  by 
branches  of  the  foreign  banks  doing  business  in  the  Orient 
—the  Hong-kong  and  Shanghai,  the  Chartered  Bank,  and 
the  Bank  of  Indo-China.  In  1907,  however,  a  native  bank 
was  established  under  royal  charter  under  the  name  of  the 
Commercial  Bank  of  Siam,  Limited.1  The  government  in 
1902  began  to  issue  currency  notes,  which  reduced  the 
circulation  of  bank-notes.  The  amount  in  currency  notes 
outstanding  is  fully  covered  by  deposits  of  silver,  except 
that  one  quarter  of  the  amount  may  be  invested  in  securities, 
from  which  the  interest  is  covered  into  the  Treasury.  The 
avowed  purpose  of  the  notes  was  to  obviate  transfers  of  coin, 
and  offices  were  established  throughout  the  country  at  which 
notes  might  be  obtained  for  silver  or  deposited  in  exchange 
for  silver.  The  notes  were  made  legal  tender  to  and  by  the 
government  and  between  individuals.8  The  amount  out- 
standing on  March  31,  1907,  was  15,209,170  ticals. 

The  tical  was  the  old  monetary  unit  of  Siam,  weighing 
236  grains,  nine-tenths  fine,  or  about  three-fifths  of  a  Mexi- 
can dollar.  The  government  undertook  to  establish  a  gold 
standard  in  1902.  The  mints  were  closed,  by  a  decree  of 
November  26th,  to  the  free  coinage  of  silver  and  an  arbitrary 
parity  was  fixed  of  twenty  ticals  to  the  pound  sterling.  It 
was  first  proposed  to  fix  it  at  seventeen  ticals,  but  this  was 
so  wide  a  departure  from  the  existing  rate  of  exchange  that 
it  led  to  vigorous  protests  and  a  modification  of  the  rate  to 
twenty  ticals  to  the  pound.  The  banks  were  also  authorized 
to  import  a  sufficient  amount  in  Mexican  dollars  to  pay  off 
the  deposits  of  the  government,  which  were  settled  on  the 
basis  of  five  ticals  to  three  dollars.8 

If  it  was  the  purpose  of  the  government  to  raise  rapidly 
the  value  of  the  tical,  they  were  greatly  aided  by  events. 
The  rate  of  twenty  ticals  to  the  pound  gave  way  before  the 


^Statesman's  Year  Book  for  1908 ',  1500. 

2  Le  Marche  Financier  en  1902-03,  968. 

3  Alglave,  in  Questions  Monttaires  Contemporaines,  660. 


BANKING  AND  EXCHANGE  IN    THE   ORIENT.      605 

rise  of  silver  and  the  tical  rose  so  rapidly  as  to  become  a 
subject  of  violent  speculation.  It  was  apparently  the  object 
of  the  government  to  produce  a  scarcity  of  silver  in  circu- 
lation by  forcing  the  use  as  far  as  possible  of  the  new 
currency  notes.  The  public  deposits  were  also  withdrawn 
rapidly  from  the  three  foreign  banks.1  In  1906  an  effort 
was  made  to  establish  a  stable  rate  of  exchange  by  serving 
notice  on  the  banks  that  the  Treasury  would,  when  it  deemed 
it  necessary,  sell  drafts  on  London  at  the  rate  of  14!  pence 
(29  cents),  which  made  the  rate  of  the  tical  about  sixteen  to 
the  pound  sterling.  The  average  rate  during  1903  was  19.84 
ticals  to  the  pound ;  1904,  i8.28ticals;  and  1905,  17.94  ticals.3 
The  closing  of  the  mints  and  growing  demand  for  money 
enabled  the  government  to  change  the  rate  again  in  1907 
to  13.33  ticals,  giving  a  gold  value  to  the  tical  of  18  pence.3 

Banking  in  Indo- China. 

The  modern  banking  needs  of  the  French  possessions  in 
the  East,  including  Indo-China  with  its  eighteen  millions 
of  people,  are  ministered  to  by  the  Bank  of  Indo-China 
(Banq2ie  de  V  Indo -Chine],  with  headquarters  at  Paris.  The 
bank  opened  its  first  branch  at  Saigon  on  April  TO,  1875, 
under  the  colonial  banking  law  of  1851. 4  The  capital,  fixed 
at  that  time  at  8,000,000  francs  ($1,544,000)  was  increased 
by  successive  stages,  until  it  stood  in  1908  at  36,000,000 
francs  ($6,948,000),  of  which,  however,  three-quarters  re- 
mained subject  to  call.5  The  bank  is  authorized  to  do  the 
business  of  a  bank  of  issue,  loans,  and  discounts  for  Cochin- 
China,  French  India,  and  New  Caledonia,  as  well  as  for  the 
protectorate  of  Cambodia,  Annam,  and  Tonkin.  There  are 
branches  in  China  and  Japan,  at  Pondicherry  in  India,  and 

1  Alglave,  662. 

2  Ecanomiste  Europeen,  August  31,  1906,  XXX.,  261. 
*  Statesman'' s  Year  Book  for  1908,  1500. 
4Denizet,  195. 

5  Reserve  funds  had  accumulated  by  the  close  of  1907  to  the  amount 
of  25,494,071  francs,  or  nearly  the  amount  of  the  uncalled  capital — 
feconomiste  Europeen,  May  29,  1908,  XXXIII.,  685. 


606         HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

in  various  other  parts  of  Asia  and  Oceanica.  The  note  issues 
are  not  permitted  to  exceed  three  times  the  metallic  reserve, 
and  the  liabilities  on  account  of  notes,  deposit  accounts,  and 
other  debts  are  not  permitted  to  exceed  three  times  the  capital 
and  reserve,  unless  the  excess  is  fully  covered  by  coin.  The 
bank  is  obliged  to  deal  in  several  different  forms  of  money 
to  meet  the  tastes  of  its  various  customers.  Mexican  dollars 
have  been  coined  at  the  Paris  mint,  rupees  are  used  at  Pondi- 
cherry,  and  francs  are  used  in  keeping  the  accounts  of  the 
bank  and  in  parts  of  its  territory.1  The  life  of  the  bank, 
originally  fixed  at  twenty  years,  was  last  extended  in  1900 
until  January  21,  I92O.2 

The  prosperity  of  the  bank  depends  to  a  large  degree  upon 
the  export  products  of  the  French  dependencies,  which 
consist  chiefly  of  rice.  When  the  exportation  of  rice  from 
Cochin-China  fell  from  512,000  tons  in  1888  to  287,000  tons 
in  1889,  discounts  and  advances  declined  by  10,000,000  francs 
and  the  bank  suffered  considerable  losses  from  the  failure  of 
Chinese  houses  with  which  it  had  large  transactions.3  The 
bank  has,  however,  survived  these  experiences  and  steadily 
extended  its  influence  and  resources.  A  branch  was  estab- 
lished at  Hong-kong  in  1894  J  at  Bangkok,  the  capital  of 
Siam,  in  1897;  arjd  at  Shanghai  in  1898.  In  Annam  and 
Tonkin  the  bank  has  forced  down  the  interest  rates  to  agri- 
culturists, from  twelve  to  fifteen  per  cent,  formerly  charged  by 
Chinese  bankers,  to  about  eight  per  cent.,  being  guaranteed 
against  loss  under  certain  conditions  by  the  government.4 
The  total  assets  of  the  bank  at  the  close  of  1907  were  228,- 
203,083  francs,  of  which  discounts  made  up  56,288,010  francs ; 
current  accounts  and  advances,  59,425,536  francs;  and  cash 
in  Paris  and  at  the  branches,  35,306,590  francs.  The  out- 
standing circulation  was  52,749,436  francs.  The  other  two 
largest  items  of  liability,  aside  from  capital,  were  the  ac- 
count of  the  Treasury  of  Indo-China,  49,290,099  francs,  and 
obligations  to  correspondents,  41,425,563  francs.6 

1  L£vy,  231.  2  Detieux,  80.  8  Denizet,  200. 

4  Goutnain-Cornille,  169. 

5  Economiste  Europeen,  May  29,  1908,  XXXIII.,  684. 


BANKING  AND  EXCHANGE  IN   THE   ORIENT.      6o/ 

The  circulation  has  increased  rapidly  in  recent  years.  The 
amount  on  December  31,  1907,  was  the  minimum  of  the 
year,  the  average  having  risen  from  42,259,0x30  francs  in  1906 
to  63,269,000  francs  in  1907.  Dividends  were  impaired  some- 
what by  the  bad  crops  beginning  in  1888,  but  were  advanced 
to  25  francs  (on  125  francs  per  share  paid  in)  for  1897,  to  30 
francs  for  1902,  and  finally  to  45  francs  for  1905,  and  47.50 
francs  for  1907.  The  average  dividend  has  been  about 
23  francs,  and  the  amount  thus  disbursed  for  1907  was 
4,234,625  francs.1 

L,ike  other  Oriental  banks,  the  principal  function  of  the 
Bank  of  Indo-China  was  that  of  an  exchange  bank,  and  per- 
manent investments  of  European  capital  were  hampered  by 
the  fall  in  the  gold  value  of  silver.  Copper  and  zinc  formed 
the  primitive  money  of  Annam,  the  principal  province  of 
Indo-China,  and  it  was  not  until  the  French  occupation  that 
even  the  Mexican  dollar  became  common.  A  decree  of 
Vice-Admiral  Bonard,  April  10,  1862,  making  clean  dollars 
and  chopped  dollars  alike  legal  tender,  had  the  effect  of  in- 
voking Gresham's  law  and  driving  out  all  but  the  chopped 
dollars.8  An  attempt  to  introduce  the  French  monetary 
system,  made  in  1864,  entirely  failed,  although  a  few  of  the 
subsidiary  coins  remained  in  circulation.  A  second  attempt, 
in  1878,  to  introduce  5-franc  pieces,  succeeded  so  far  as  the 
acceptance  of  the  coins  was  concerned,  but  they  were  ac- 
cepted as  the  equivalent  of  gold  exchange  on  France  and 
did  not  remain  in  local  circulation.3  After  this  experiment 
the  piaster  was  accepted  as  the  unit  of  Oriental  coinage  and 
subsidiary  coins  were  struck  to  fill  the  void  caused  by  the 
insufficiency  of  Mexican  pieces.  Not  until  1885  were  piasters 

1  Cf.  Goumain-Cornille,  134,  and  ILconomiste  Ruropeen,  May  29, 
1908,  XXXIII.,  684. 

8  Arnaun6,  335. 

3  Mexican  piasters  at  this  time  were  worth  4.75  francs  in  gold.  The 
French  5-franc  pieces  were  lighter,  but  for  about  three  per  cent,  could 
be  shipped  to  France,  which  made  their  exchange  value  4.85  francs. 
De"tieux  declares  that  the  first  issues  of  5-franc  pieces  were  insufficient 
to  meet  the  demand  for  exchange  on  France. — La  Question  Monetaire 
en  Indo-Chine,  57. 


608         HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

coined,  and  again  they  disappeared  from  circulation  undet 
the  pressure  of  Gresham's  law,  because  they  were  heavier 
than  the  British  dollar  and  the  Japanese  yen.  Finally, 
in  1895,  a  new  piaster  was  authorized  of  substantially 
the  same  weight  and  fineness  as  its  competitors  in  the 
trade  of  the  East.  Of  this  type  66,336,692  were  coined 
before  the  problem  was  taken  up  of  establishing  a  gold- 
exchange  standard.1 

The  first  plan  for  bringing  about  stability  of  exchange, 
proposed  by  the  eminent  colonial  governor,  M.  Doumer,  in 
1897,  was  decided  by  a  special  commission  to  lack  the  neces- 
sary elements  of  success.2  The  fall  of  silver  in  1902,  and  the 
closing  of  the  mints  of  Siani  in  the  autumn  of  that  year  to 
the  free  coinage  of  the  metal,  emphasized  anew  the  necessity 
for  action.  The  government  of  Indo-China  announced  a 
plan  for  a  conference  of  representatives  of  Hong-kong,  Sin- 
gapore, China,  and  Indo-China,  in  connection  with  the 
exposition  at  Hanoi.  Conditions  were  so  serious,  however, 
that  they  attracted  the  attention  of  the  government  at  home, 
and  led  to  the  appointment  of  a  special  commission  from  dif- 
ferent ministries  interested  in  colonial  or  financial  affairs. 
On  this  commission,  named  on  December  3,  1902,  sat  M.  Pal- 
lain,  Governor  of  the  Bank  of  France;  Andre  Benac,  of  the 
Ministry  of  Finance  ;  the  eminent  economists,  Charles  Lau- 
rent and  Maurice  Bloch ;  M.  Simon,  head  of  the  Bank  of 
Indo-China,  and  many  departmental  officials.  Only  five 
formal  sittings  of  the  commission  were  held,  and  its  work 
was  concluded  on  March  28,  1903.  The  various  plans  which 
had  been  proposed  were  discussed,  but  palliatives  were  recom- 
mended rather  than  a  definite  constructive  policy. 

M.  Arnaune,  Director  of  the  French  Mint,  prepared  the 
report,  and  he  opposed  the  immediate  adoption  of  a  fixed 
par  of  exchange  upon  the  ground  that  it  could  not  be  main- 

1  Arnaune*,  344, 

2  M.  Doumer  proposed  simply  to  suspend  free  coinage  of  silver,  fix 
the  piaster  at  2.50  francs,  and  rely  upon  scarcity  to  maintain  parity. 
The   facts  are  fully  set  forth  in  the  able  and  convincing  work  of 
M.  Detieux,  La  Question  Mon&taire  en  Indo-Chine,  190-97. 


BANKING  AND  EXCHANGE  IN   THE   ORIENT.      609 

tained  in  the  face  of  an  adverse  balance  of  trade.1  The 
measures  adopted  were  the  suppression  of  the  export  tax  on 
silver  coins,  the  gradual  retirement  and  recoinage  of  Mexican 
piasters,  including  limitation  of  their  legal-tender  quality, 
and  the  issue  of  a  sufficient  quantity  of  French  piasters  to 
meet  the  needs  of  commerce.  The  importation  of  Mexican 
coins  was  prohibited  and  a  convention  was  made  with  the 
Bank  of  Indo-China  for  the  gradual  exportation  of  the  stock 
in  the  country.  Their  exodus  was  encouraged  by  the  de- 
mand for  money  in  Manchuria  in  1905,  due  to  the  war 
between  Russia  and  Japan,  and  the  flight  of  the  French 
pieces  also  was  stayed  only  by  a  decree  of  January  30,  1905, 
imposing  an  export  tax.2 

The  incompleteness  of  the  measures  taken  in  1903  was  the 
subject  of  severe  criticism  by  French  exporting  interests  and 
leading  economists.  The  French  chambers  of  commerce 
almost  unanimously  urged  the  definite  adoption  of  the  ex- 
change standard.3  The  Governor  of  Indo-China  appointed 
a  local  commission  October  8,  1905,  which  recommended  a 
value  for  the  piaster  of  2.75  francs  ($0.531)  and  the  adoption 
of  the  Philippine  system  for  maintaining  the  parity  of  the 
silver  coins.  The  home  government  was  not  ready  to  ap- 
prove this  step,  and  the  rise  of  silver  carried  the  value  of  the 
bullion  contents  of  the  piaster  for  a  brief  period  in  1906  as 
high  as  2.94  francs,  or  nearly  seven  per  cent,  above  the  pro- 
posed parity.  The  local  currency  remained  subject  to  the 
fluctuations  of  the  market  for  silver  bullion,  except  that  the 
government  intervened  from  time  to  time  in  fixing  a  rate 


1  A  synopsis  of  the  views  of  M.  Arnaune"  is  given  by  Detieux,  320- 
28,  and  these  views  are  analyzed  by  him,  La  Question  Monetaire  en 
Indo-Chine,  382-84,  substantially  in  accord  with  the  policy  of  the 
present  writer. 

2  Detieux,  333. 

3  Vide  list  in  Detieux,  311,  and  report  of  the  Paris  Chamber,  May 
*3>  I9°3>  by  M-  Laguionie,  Commission  on  International  Exchange, 
1903,  379-91.     The  latter  report    declared    flatly   for    "  a    gold  fund 
destined  to  pave  the   way    for   the  ult'mate   adoption  of  the   gold 
standard." 


6io 


fflSTORY  OF  MODERN  BANKS  OF  ISSUE. 


for  official  purposes  which  followed  in  a  halting  manner  the 
market  rate,  without  conforming  to  it.1 

1  Thus,  from  June  15,  1908,  the  rate  was  2.45  francs,  which  was 
changed  on  June  22,  1908,  to  2.50  francs. — J-Lconomiste  Europben, 
June  26,  1908,  XXXIII.,  804. 


CHAPTER  XXII. 


THE   EARI,Y   CRISES   OF  THE   LAST  CENTURY. 

The  Periodicity  of  Crises  up  to  1793 — The  Use  of  Accommodation 
Bills  in  the  Crisis  of  1782— The  Effects  of  the  Napoleonic  Wars 
and  the  Crisis  of  1810 — The  Speculative  Mania  of  1825 — The 
Specie  Circular  and  the  Bank  War  in  the  United  States — The 
Railway  Development  and  the  Crisis  of  1847. 

THE  development  of  existing  methods  of  commerce 
and  of  credit  belongs  essentially  to  the  period  of  the 
last  century  and  a  half.  Great  commercial  transactions 
were  carried  on  before  that  time,  but  they  were  carried  on  by 
other  banking  methods  than  those  of  the  modern  age.  The 
world  was  not  linked,  as  it  is  to-day,  in  all  its  parts,  by  a 
community  of  commercial  operations  and  by  houses  of 
international  banking  credit.  Such  economic  crises  as  oc- 
curred were  local  in  their  effects  and  were  produced,  much 
more  directly  and  more  often  than  those  of  to-day,  by 
political  events.  Their  chief  interest,  therefore,  is  in  demon- 
strating the  essentially  periodic  character  of  such  convulsions 
wherever  commerce  has  attained  anything  like  its  modern 
development.  Professor  Jevons  finds  some  evidence  of  a 
stock-jobbing  mania  as  far  back  as  1682  and  others  in  1711, 
1721,  1731,  1763,  1772-73,  and  1783,  with  evidence  of  periods 
of  high  prices  in  1742  and  1752.  Complaints  of  stock  job- 
bing and  "  bubbling  "  were  so  pronounced  that  acts  were 
passed  by  Parliament  in  1710  and  1711,  and  again  in  1733, 
with  the  result,  according  to  Defoe,  that  "  a  happy  stop  was 
put  to  this  spreading  mischief."  1 

1  Jevons,  Investigations  in  Currency  and  Finance,  210-211. 

611 


6l2          HISTORY  OF  MODERN  BANK'S  OF  ISSUE. 

The  first  serious  credit  crisis  of  which  authentic  details 
exist  was  that  of  1763,  when  the  inflated  bubble  blown  by 
the  Seven  Years'  War  was  pricked  by  the  coming  of  peace. 
This  crisis  is  of  peculiar  interest,  because  it  was  most  severe 
at  Amsterdam  and  Hamburg,  where  no  paper  currency  wras 
employed  except  the  "bank  money  "  issued  against  deposits 
of  coin  by  the  Bank  of  Amsterdam  and  the  Bank  of  Ham- 
burg. The  next  great  crisis, — that  of  1772, — fell  upon  Eng- 
land and  Scotland  in  the  midst  of  a  period  of  remarkable 
industrial  and  inventive  activity.  The  first  act  for  the  build- 
ing of  a  canal  in  Bngland  was  passed  in  1755,  and  the  next 
twenty-five  years  witnessed  the  construction  of  a  network 
of  canals  more  extensive  than  those  of  any  other  country 
except  Holland.  Brindley  completed  the  canal  from  Worsley 
to  Manchester  in  1762  and  Arkwright  and  Watt  were  at  the 
same  time  developing  their  wonderful  mechanical  inventions. 

The  practice  of  drawing  accommodation  bills  seems  to 
have  come  into  use  in  Scotland  for  the  first  time  just  before 
this  crisis,  although  there  is  evidence  that  it  had  been  prac- 
tised earlier  in  England.  A  newspaper  of  the  time  contained 
a  letter  stating  that  ' '  Banking  companies  had  appeared  in 
almost  every  corner  of  the  Kingdom,  and  bills  of  exchange 
had  been  multiplied  by  a  new  method  called  Swivelling, 
without  any  solid  transactions. ' '  Adam  Smith  alludes  to 
"  the  well-known  shift  of  drawing  and  redrawing,"  and  says 
that  "The  practice  of  raising  money  in  this  manner  had 
been  long  known  in  England,  and  during  the  course  of  the 
late  war,  when  the  high  profits  of  trade  afforded  a  great 
temptation  to  overtrading,  is  said  to  have  been  carried  on  to 
a  very  great  extent. ' '  *  Professor  MacL,eod  declares  the 
system  of  accommodation  bills  to  be  "  the  curse  and  bane  of 
commerce,"  and  expresses  the  opinion  that  "it  has  been  the 
great  cause  of  those  frightful  commercial  crises  which  seem 
periodically  to  recur."  The  English  courts  have  decided, 
however,  that  a  bill  given  for  a  consideration  is  a  good  bill 


1  Public  Advertiser,  July  8,  1772,  quoted  by  MacLeod,  II.,  215. 
8  Wealth  of  Nations,  Book  II.,  Ch.  ii. 


THE  EARLY  CRISES  OF  THE   CENTURY.  613 

and  that  such  consideration  exists  when  such  bills  are  mu- 
tually interchanged.  This  makes  it  difficult  to  legislate 
against  accommodation  bills,  even  if  it  were  desirable,  with- 
out destroying  banking  transactions,  which  are  based  upon 
a  similar  interchange  of  credits.1 

The  crisis  of  1783  is  notable  for  having  had  an  international 
character,  in  affecting  the  Caisse  d' Escompte  in  Paris  as  well 
as  the  British  banks,  and  for  the  enlightened  policy  of  sus- 
taining credit  adopted  by  the  Bank  of  England.  A  policy 
of  rigid  contraction  was  at  first  followed  by  the  directors, 
but  as  soon  as  this  policy  had  turned  the  flow  of  bullion 
towards  England  they  came  boldly  to  the  assistance  of  the 
government  and  expanded  their  discounts  to  solvent  houses. 
A  different  policy  was  pursued  in  the  crisis  of  1793  and  it 
was  the  government,  instead  of  the  bank,  which  came  to  the 
relief  of  credit.  Everything  was  ripe  in  England  in  1792 
for  the  explosion  of  a  crisis  when  the  disturbances  in  France 
and  the  declaration  of  war  by  the  National  Convention 
applied  the  torch.3  A  large  failure  occurred  in  I/mdon  on 
February  15,  1793,  and  the  panic  spread  throughout  England, 
causing  the  failure  of  over  one  hundred  of  the  country  banks 
and  frightening  the  Bank  of  England  into  the  reduction  of 
its  discounts.3  The  pressure  for  money  suggested  to  Sir 
John  Sinclair  a  return  to  Montague's  device  in  1697  of  issu- 
ing Exchequer  bills  to  solvent  merchants.  A  committee  was 
appointed  by  the  House  of  Commons,  which  promptly  re- 

1  MacLeod,  Theory  and  Practice  of  Banking,  L,  359-68. 

2  M.  Juglar  lays  stress  upon  the  fact  that  this  crisis  was  a  typical 
commercial  crisis,  due  to  economic  conditions,  and  was  not  essentially 
hastened  by  the  declaration  of  war,  for  unfavorable  exchanges  and 
exports  of  specie  had  already  set  in  twelve  months  before  hostilities. 
France  suffered  a  severe  crop  failure  in  1789,  but  this  did  not  arrest 
the  expansion  of  credit  and  of  commercial  operations  until  the  period 
of  ten  years  from  the  preceding  crisis  of  1783. — Des  Crises  Commer- 
ciales,  302. 

3  Country  merchants  and  bankers  were  permitted  under  then  exist- 
ing laws  to  issue  optional  notes,  payable  in  the  country  or  in  London, 
and  it  is  stated  that  out  of  279  country  bankers  issuing  notes  204 
issued  these  optional  notes. — Levi,  69. 


6 14  HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

ported  in  favor  of  the  issue  of  ^5,000,000  in  such  bills  under 
the  direction  of  a  board  of  commissioners.  The  bill  was 
passed  after  some  opposition  and  afforded  almost  instant 
relief.  Applications  for  ,£2,202,000,  made  by  238  persons  or 
firms,  were  granted  and  only  forty-nine  applications  were 
definitely  rejected.  Only  two  of  the  parties  assisted  became 
bankrupt,  much  of  the  money  was  repaid  before  it  was  due, 
and  the  government  obtained  a  clear  profit,  above  all  inci- 
dental expenses,  of  ^4348. 

The  period  from  the  crisis  of  1793  to  the  close  of  the  Na- 
poleonic wars  in  1815  was  marked  by  several  spasms  of  panic 
in  the  markets  of  Great  Britain  and  the  Continent,  but  these 
convulsions  were  so  directly  due  to  political  events  that 
they  lose  much  of  the  regular  character  of  commercial  phe- 
nomena. The  period  of  expanding  credit  wras  interrupted 
in  Kngland  by  the  suspension  of  specie  payments  in  1797, 
and  was  again  cut  short  in  1803,  after  the  upward  movement 
had  been  resumed,  by  the  rupture  of  the  Peace  of  Amiens. 
France  witnessed  a  collapse  of  credit  soon  after  the  rupture 
of  the  Peace,  which  brought  Napoleon  back  from  Austerlitz 
to  reorganize  the  Bank  of  France.1  The  speculative  oppor- 
tunities of  the  long  war  left  their  impress  upon  the  trade  of 
Europe  and  the  United  States  for  many  years,  and  the  inci- 
dents of  the  trade  drove  the  United  States  into  war  with 
Great  Britain. 

The  Crisis  of  1810. 

The  publication  of  the  Berlin  decree  of  Napoleon  on  No- 
vember 21,  1806,  shutting  British  commerce  out  of  Europe, 
was  one  of  a  series  of  events  which  led  to  the  wildest  specu- 
lation in  raw  materials  and  steadily  advanced  their  prices. 
The  products  of  the  countries  of  the  East  rose  to  double  or 
treble  their  usual  figures,  and  the  French  occupation  of 
Spain  quadrupled  the  price  of  Spanish  wool.  France  was 
supreme  in  Italy,  which  affected  the  value  of  silk,  and  she 
attempted  to  dictate  a  policy  of  exclusion  against  Great 
Britain  to  Russia  and  Sweden.  These  efforts  of  the  French 

1  Vide  p.  46. 


THE  EARLY  CRISES  OF  THE  CENTURY. 

Emperor  were  far  from  effective  in  stifling  commerce,  but 
they  gave  it  the  character  of  a  speculation  and  enhanced  its 
profits  when  it  was  successful.  The  imports  of  the  United 
Kingdom  increased  from  ^28,561,270  in  1805  to  ,£39,301,- 
612  in  1 8 10  and  the  exports  increased  in  the  same  period 
from  ,£31, 064,492  to  /43, 568, 757.  England  lost  trade  in 
the  United  States  by  her  retaliatory  decrees  against  Na- 
poleon, which  drove  American  products  to  France,  but  Brit- 
ish goods  penetrated  through  Napoleon's  paper  blockade  at 
Embden  and  Hamburg,  and  the  corrupt  French  officials 
grew  rich  as  the  price  of  certifying  that  these  goods  were  the 
product  of  Prussian  factories.1  The  country  banks  of  Eng- 
land increased  under  the  stimulus  of  speculation  from  270 
in  1797  to  600  in  1808,  and  721  in  1810.  The  Bank  of  Eng- 
land, in  the  meantime,  increased  its  discounts  from  .£9,100,- 
ooo  in  1804  to  ,£16,400,000  in  1809,  and  £2 1,400,000  in  1810. 
The  circulation  of  the  Bank  of  England  rose  from  .£16,400,- 
ooo  in  1801  to  ,£24,200,000  in  1810,  but  the  increase  was 
trifling  up  to  1809  and  was  the  consequence  rather  than  the 
cause  of  the  great  increase  in  prices  due  to  speculation. 

If  over-issues  of  bank-notes  were  responsible  in  some  de- 
gree for  the  speculative  mania  in  England,  rather  than 
merely  its  convenient  tools,  it  was  because  the  divorce  of 
the  paper  currency  from  specie  made  bank-note  issues  easy 
and  their  issuers  irresponsible.  The  proof  that  the  specula- 
tive mania  was  not  due  entirely  to  the  issues  of  paper  money 
in  Great  Britain  may  be  found  in  the  fact  that  a  like  condi- 
tion existed  in  France,  which  was  upon  a  specie  basis.  The 
liquidation  which  followed  the  crisis  of  1805  caused  coin  to 
pile  up  in  the  Bank  of  France  to  such  an  extent  that  the 
bank  was  obliged  to  invest  a  part  in  the  obligations  of  the 
receivers  general  and  to  reduce  interest  to  two  and  three  per 
cent.2  Commerce  began  to  expand  again  in  1808,  and  the 
discounts  of  the  Bank  of  France  reached  in  that  year  142,- 
000,000  francs  and  in  1810  187,000,000  francs.  Numerous 
failures  occurred  in  1810,  but  the  leading  merchants  of  Paris 

1  Cunningham,  II.,  521,  note. 
'Juglar,  406. 


616          HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

kept  their  heads,  discouraged  exaggerated  speculations,  and 
prevented  a  serious  panic.  In  England,  business  came  to  a 
standstill,  the  discounts  of  the  bank  dropped  from  ^23,000,- 
ooo  to  ^12,000,000  and  on  April  n,  1811,  the  Treasury 
came  to  the  rescue  of  the  market  by  an  advance  of  ^6,000,- 
ooo  in  Exchequer  bonds  to  merchants  offering  good  security. 
The  period  of  liquidation  was  made  more  severe  than  usual 
and  recovery  slower  by  the  great  poverty  of  the  crops  of 
1811.  Speculation  in  agricultural  products  and  land  led  to 
the  rapid  extension  of  the  system  of  enclosure  of  land  which 
had  formerly  been  in  commons.  Such  large  sums  were  sunk 
in  fencing  and  improvements  and  so  much  land  was  brought 
tinder  cultivation  that  the  'fall  of  prices,  upon  the  close  of 
the  Napoleonic  wars  and  the  resumption  of  specie  payments, 
ruined  many  small  cultivators  and  threw  their  land  again 
upon  the  market.1 

The  Crises  of  18  1^-19. 

The  commercial  movements  of  the  second  decade  of  the 
present  century  reflected  the  disturbed  condition  of  public 
affairs.  The  policy  of  crushing  each  other's  trade  by  paper 
blockades  and  interference  with  the  rights  of  neutrals,  which 
governed  England  and  her  allies  on  one  side  and  France  and 
her  dependencies  on  the  other,  made  commerce  like  the  cast- 
ing of  dice  in  a  game  of  chance.  Markets  which  had  been 
closed  to  English  and  American  goods  were  opened  from 
time  to  time,  with  the  expulsion  of  the  French  from  Portu- 
gal and  Spain  and  the  accession  of  Russia  and  Sweden  to 
the  coalition  against  Napoleon.  The  news  of  his  disasters 
in  Russia  in  the  autumn  of  1812  diffused  the  belief  in  Eng- 
land that  the  French  Emperor  was  upon  the  eve  of  his  down- 
fall and  that  France  would  soon  be  thrown  open  to  the 
commerce  of  the  world.  Speculation  ran  riot  in  colonial 
produce,  which  it  was  believed  would  find  a  ready  market 
in  France  at  the  extravagant  prices  which  ruled  there  for 
the  small  quantities  which  had  escaped  the  Continental 

1  Cunningham,  II.,  479. 


THE  EARLY  CRISES  OF  THE   CENTURY.  617 

blockade.1  The  rejection  of  the  recommendations  of  the 
Bullion  Report  and  the  depreciation  of  irredeemable  bank- 
notes in  England  encouraged  the  delusion  that  the  growth 
of  wealth  was  commensurate  with  the  rise  of  prices.  Prices 
reached  their  maximum  at  the  moment  of  the  abdication  of 
Napoleon  in  the  spring  of  1814  and  the  coming  of  the  gen- 
eral peace.  The  opening  of  the  Continental  markets  had 
been  too  greatly  discounted,  goods  could  not  be  sold  at  the 
prices  at  which  they  were  held,  and  the  fabric  of  paper 
wealth  tumbled  like  a  house  of  cards.  The  country  banks 
failed  by  the  score  in  1815,  1816,  and  1817,  and  the  disap- 
pearance of  their  notes  so  contracted  the  paper  circulation 
that  Bank  of  England  paper  seemed  for  a  moment  on  the 
point  of  touching  par.2 

The  United  States  were  already  feeling  the  embarrassments 
of  a  new  country  in  maintaining  an  adequate  metallic  circu- 
lation, when  the  War  of  1812  and  the  financial  incompetence 
of  the  government  precipitated  a  crisis.  The  expiration  of 
the  charter  of  the  Bank  of  the  United  States  in  1811  brought 
many  new  banks  into  the  field  and  a  veritable  banking  mania 
prevailed  for  several  years  in  the  Middle,  Southern,  and  West- 
ern States.  The  offer  of  the  Pennsylvania  shareholders  of 
the  Bank  of  the  United  States  to  pay  a  bonus  of  $500,000  to 
the  State  for  the  privileges  of  a  State  charter,  and  to  loan 
the  State  $500,000  in  addition, 3  aroused  such  extravagant 
estimates  of  the  profits  of  banking  that  the  proposition  was 
rejected  and  an  effort  made  to  secure  these  profits  for  local 
banks.  A  bill  authorizing  forty-one  new  banks  was  passed 
over  the  veto  of  the  governor  and  thirty-seven  of  them  went 
into  operation  in  1814.  Similar  events  occurred  in  other 
States,  and  in  two  years  the  number  of  banks  in  the  United 
States  increased  from  88  to  208.  The  volume  of  specie  was 
not  adequate  to  support  the  mass  of  credit  thus  attempted 
to  be  created  and  what  there  was  in  the  country  rapidly 

1  Coffee,  which  was  four  pence  per  pound  in  Bngland,  had  been 
selling  for  four  or  five  shillings  in  France.— Juglar,  323. 

2  Wdep.  in. 

3  McMaster,  IV.,  287. 


6l8          HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

drifted  to  New  England,  where  prices  were  low  and  transac- 
tions were  upon  a  metallic  basis. 1 

It  needed  but  a  breath  to  overthrow  credit  in  the  South 
and  West,  and  the  motive  came  with  the  capture  of  Wash- 
ington on  August  24,  1814.  The  banks  of  Philadelphia 
announced  their  suspension  on  August  3ist,  and  the  banks 
of  New  York  followed  on  the  next  day,  and  did  not  resume 
until  after  the  creation  of  the  second  Bank  of  the  United 
States  in  1817.  The  country  was  stripped  of  specie,  notes 
were  issued  for  as  small  an  amount  as  one  cent,  and 
many  municipalities  put  out  notes  for  a  few  cents,  redeem- 
able in  bank-notes  and  receivable  for  taxes.  *  The  period 
following  the  war  was  one  of  prostration  in  the  United 
States  as  well  as  in  Great  Britain.  The  United  States  were 
for  a  short  time  importers  and  found  the  British  exporters 
eager  to  sell  because  of  the  excessive  stocks  they  had 
accumulated  in  anticipation  of  the  European  peace.  But 
importations  fell  off  as  the  American  people  discovered  the 
real  poverty  with  which  they  had  come  out  of  the  war. 
The  month  of  August,  1819,  found  20,000  persons  seeking 
employment  in  Philadelphia,  and  a  similar  condition  of 
affairs  in  the  other  great  cities  of  the  North. 3 

The  economic  disturbances  in  England  were  chiefly  mone- 
tary in  1817  and  1818,  but  were  intensified  by  scarcity  and 
the  high  prices  of  cereals.  The  monetary  difficulties  were 
due  to  the  steady  withdrawal  of  gold  for  foreign  coinages 
and  in  the  form  of  subscriptions  to  Prussian,  Austrian,  and 
French  loans.  The  sum  of  125,000,000  francs  in  gold  was 
coined  at  the  Paris  mint,  of  which  three- fourths  was  esti- 
mated to  have  been  drawn  from  England.  *  France,  in  the 
meantime,  was  paying  the  penalty  of  defeat  in  the  field. 
Commercial  affairs  were  brought  nearly  to  a  standstill  by 
the  entrance  of  the  Allied  armies  into  Paris  in  1814,  and 
they  suffered  another  period  of  enforced  liquidation  after 

1  Vide  p.  363. 

2  McMaster,  IV.,  297. 

3  Sumner,  History  of  American  Currency >  79. 
4Juglar,  327. 


THE  EARLY  CRISES  OF  THE  CENTURY.  619 

Napoleon's  return  from  Elba  in  March,  1815.  France  was 
obliged,  after  Waterloo,  to  issue  500,000,000  francs  of 
public  obligations  to  pay  the  war  contributions  imposed 
upon  her.  The  price  of  securities  fell  so  disastrously  that 
the  Minister  of  Finance  came  to  the  rescue  of  the  market 
and  loaned  freely  to  the  speculators,  in  order  to  maintain 
prices.  The  result  was  to  bring  the  securities  raining  upon 
the  Paris  market  and  to  increase  the  exportation  of  bullion.  l 
The  metallic  reserve  of  the  Bank  of  France  fell  from  117,- 
000,000  francs  on  July  i,  1818,  to  37,000,000  francs  on 
October  29th.  The  bank  shortened  the  term  of  commercial 
discounts  to  forty-five  days  and  in  1819  was  flooded  again 
with  idle  capital. 

The  Crisis  of  1825. 

The  next  great  crisis  which  shook  the  commercial  world 
attained  its  height  in  England  at  the  end  of  the  year  1825  = 
The  metallic  reserve  of  the  Bank  of  England  steadily  in- 
creased from  1820  until  1823,  when  it  stood  at  ^14,100,000, 
while  the  circulation  was  reduced  until  it  stood  at  about 
^16,300,000.  The  Bank  was  required  by  the  Act  of  1819  to 
retire  its  ^5  notes  by  redeeming  them  in  gold  within  four 
years.  This  demand  for  gold,  comparatively  trifling  in  itself, 
was  accompanied  by  a  foreign  drain  due  to  the  immense 
loans  contracted  by  the  governments  of  Europe  and  Latin 
America  and  the  fever  of  speculation  in  domestic  and  Amer- 
ican companies  which  developed  in  England.  This  specula- 
tive mania  was  attributed  by  Mr.  J.  H.  Palmer,  the  Governor 
of  the  Bank  of  England,  to  the  reduction  of  the  interest  on 
government  securities.  He  said  to  the  Parliamentary  com- 
mittee of  inquiry  into  the  causes  of  the  crisis  : 

The  first  movement  in   that  respect   was,  I   think,  upon  ^135,000,- 

000  of  five  per  cents.,  which  took  place  in  1823.     In  the  subsequent 
year,  1824,  followed  the  reduction  of  ^"80,000,000  of  four  per  cents. 

1  have  always  considered  that  reduction  of  interests,  one-fifth  in  one 
case,  and  one-eighth  in  the  other,  to  have  created  the  feverish  feeling 

1  Raffalovich,  Marche  Financier  en  1891,  9. 


620          HISTORY  OF  MODERN  BANKS   OF  ISSUE. 

in  the  minds  of  the  public  at  large,  which  prompted  almost  every- 
body to  entertain  any  proposition  for  investment,  however  absurd, 
which  was  tendered.  The  excitement  of  that  period  was  further  pro- 
moted by  the  acknowledgment  of  the  South  American  republics  by 
this  country,  and  the  inducements  held  out  for  engaging  in  mining 
operations,  and  loans  to  those  governments,  in  which  all  classes  of 
the  community  in  England  seem  to  have  partaken  almost  simultane- 
ously. With  those  speculations  arose  general  speculation  in  commer- 
cial produce,  which  had  an  effect  of  disturbing  the  relative  values 
between  this  and  other  countries,  and  creating  an  unfavorable  foreign 
exchange,  which  continued  from  October,  1824,  to  November,  1825, 
causing  a  very  considerable  export  of  bullion  from  the  bank,  about 
seven  millions  and  a  half.  ' 

The  correctness  of  these  views  is  supported  by  the  phrensy 
of  speculation  which  seized  the  community.  The  new  re- 
publics of  Latin  America,  the  New  European  states  which 
had  been  carved  out  of  the  Empire  of  Napoleon,  and  the 
older  governments  which  had  incurred  heavy  war  expenses, 
appeared  in  the  London  market  as  borrowers  and  the  public 
loans  issued  within  four  years  were  estimated  at  nearly  ^50,- 
000,000.  Stock  companies  were  formed  with  objects  as 
indefinite  and  impracticable  as  in  the  time  of  the  South  Sea 
Bubble.  One  which  found  subscribers  proposed  to  drain  the 
Red  Sea  to  recover  the  gold  lost  by  the  Egyptians  when 
pursuing  the  Isiaelites.2  It  was  estimated  that  ^150,000,000 
of  British  money,  including  that  invested  in  government 
loans,  had  been  sunk  in  Mexico  and  South  America  alone.3 
Much  of  it  went  into  mining  shares,  which  advanced  fabu- 
lously during  1824  and  1825.  The  Real  del  Monte  shares, 
on  which  ^70  was  paid,  were  at  ^550  in  December,  1824, 
and  ^1350  in  the  following  January.  The  first  payments 
required  did  not  usually  exceed  five  per  cent,  of  the  par  value 
of  the  shares,  so  that  the  humblest  were  able  to  count  upon 
enormous  dividends  from  very  trifling  investments.  The  num- 
ber of  stock  companies  created  was  computed  at  624,  calling 
for  a  nominal  capital  of  ^372,173,100.  This  enormous 

1  Gilbart,  L,  65. 

2  Juglar,  334. 

3  Macl/eod,  Theory  and Practice  of  'Banking,  II.,  in 


THE  EARLY  CRISES  OF  THE   CENTURY.  621 

sum,  if  actually  paid  in,  would  have  required  $1,850,000,000 
of  capital,  and  in  the  England  of  that  day,  with  her  popula- 
tion of  13,000,000,  would  have  represented  an  investment  of 
nearly  $150  per  capita,  or  one-third  of  the  wealth  of  the 
country. 

The  withdrawal  of  so  much  capital  from  legitimate  com- 
mercial uses  as  was  actually  paid  into  these  companies  caused 
a  sharp  increase  in  the  value  of  money  and  the  prices  of 
commodities,  and  manufacturers  were  forced  to  borrow  money 
to  carry  on  their  ordinary  operations  at  the  increased  rates. 
The  rising  prices  in  the  latter  half  of  the  )7ear  1825  reduced 
purchases,  the  warehouses  began  to  fill  and  the  owners  of 
merchandise  were  confronted  with  the  usual  dilemma  of  a 
commercial  crisis, — to  sell  their  goods  at  a  loss  or  make  new 
loans  at  higher  rates  of  discount.  The  coin  reserve  of  the 
Bank  of  England  steadily  declined  after  March,  1824,  when 
it  stood  at  ^13,800,000,  until  it  reached  ,£9,490,420  on  Janu- 
ary 29,  1825,  and  ,£6,659,780  at  the  end  of  April.  The 
reserve  had  been  forced  down  to  ^3,012,150  on  November 
26th,  and  the  country  banks,  which  had  been  increasing  their 
discounts  and  their  note  issues,  were  suddenly  brought  to  a 
halt  by  the  failure  of  Sir  Peter  Pole  and  Co.,  on  Monday, 
December  12,  1825.  Sixty-three  country  banks  were  forced 
to  suspend,  and  "  the  consequence,"  says  Mr.  Bagehot, 
"  was  a  panic,  so  tremendous  that  its  results  are  well  remem- 
bered after  nearly  fifty  years." 

The  Bank  of  England  went  on  expanding  its  discounts  up 
to  the  end  of  April,  in  spite  of  an  adverse  foreign  exchange 
and  the  rapid  reduction  of  the  coin  reserve.  The  process  of 
contraction  began  in  May,  but  the  bank  did  not  raise  the  dis- 
count rate  until  the  panic  had  actually  broken.  It  was  not 
until  December  i3th,  that  they  advanced  the  rate  from  four 
per  cent,  to  five.  The  policy  of  contraction  during  the  first 
days  of  the  panic,  on  Monday  and  Tuesday,  caused  absolute 
paralysis  of  business.  Mr.  Huskisson  said  afterwards  in  the 
House  of  Commons  that  during  these  two  days,  "  It  was 
impossible  to  convert  into  money,  to  any  extent,  the  best 
securities  of  the  government."  The  usury  laws,  which 


622          HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

limited  the  rate  of  interest  outside  the  Bank  of  England  to 
five  per  cent.,  prevented  loans  of  private  capital,  which 
might  have  been  willingly  made  at  seven,  eight,  or  ten  per 
cent.  The  very  desperateness  of  the  situation  brought  its 
own  remedy  in  time  by  forcing  the  sale  of  commodities  at  a 
ruinous  loss,  which  brought  foreign  capital  pouring  back 
into  England  in  the  purchase  of  goods.  The  directors  of 
the  bank  changed  their  course  on  Wednesday,  enlarged 
their  issues  to  solvent  borrowers,  and  almost  in  a  moment 
the  panic  was  stayed  in  London. 

The  bank  issued  upwards  of  ,£5,000,000  in  notes,  between 
Wednesday  and  Saturday,  by  advances  on  stock  and  Ex- 
chequer bills  as  well  as  by  discounts, — in  the  language  of 
Mr.  Jeremiah  Harman,  one  of  the  directors,  ' '  by  every  pos- 
sible means  consistent  with  the  safety  of  the  bank  ;  and  we 
were  not,  upon  some  occasions,  over-nice. ' '  The  coin  in  the 
vaults  of  the  Bank  of  England  scarcely  exceeded  .£1,000,- 
ooo  on  Saturday  night  of  this  eventful  week  and  the  influ- 
ence of  the  panic  had  not  been  fully  stayed  throughout  the 
country.  The  clamor  for  gold  was  stilled,  however,  by  the 
free  issue  of  notes  and  a  box  of  ^i  notes  was  sent  down  into 
the  country.  The  Gurneys,  who  did  business  at  Norwich, 
displayed  piles  of  notes  many  feet  thick  on  their  counters 
and  prevented  a  run  by  the  confidence  which  this  exhibi- 
tion inspired.  The  aid  of  the  Bank  of  France  was  sought 
and  a  credit  for  ,£2,000,000  opened  on  three  months  bills.1 
The  sum  of  ,£400,000  arrived  from  France  in  gold  on  Mon- 
day, the  1 9th,  but  the  deputy  governor  of  the  Bank  of  Eng- 
land had  already  given  the  assurance  to  Lord  Liverpool  on 
Saturday  evening  that  the  danger  was  over  in  the  city  and 
that  quiet  would  soon  be  restored  in  the  country. 

The  crisis  of  1825  was  an  essentially  English  crisis,  be- 
cause loanable  capital  was  more  plentiful  in  England  than 
elsewhere  and  the  speculative  mania  was  mainly  confined  to 
the  London  market.  The  solidarity  of  the  world's  markets 
was  indicated,  however,  by  the  appeal  to  the  Bank  of  France 


"Levi,  188. 


THE  EARLY  CRISES  OF  THE  CENTURY.  62$ 

and  by  the  reflex  influence  of  the  crisis  in  France  and  the 
United  States.  The  war  with  Spain  caused  some  curtail- 
ment of  commercial  operations  in  France  in  1823  and  broke 
the  force  of  the  ascending  movement  of  business.  Much  of 
the  gold  expelled  from  England  by  unfavorable  exchanges 
found  its  way  into  the  Bank  of  France,  so  that  when  the  re- 
flex movement  of  the  English  crisis  was  felt  in  France  in  the 
demand  for  enlarged  discounts,  the  bank  had  an  ample  re- 
serve to  meet  it.  The  volume  of  discounts,  which  had  been 
478,000,000  francs  in  1824,  increased  to  638,000,000  in  1825 
and  688,000,000  in  1826,  and  fell  to  556,000,000  in  1827  and 
402,000,000  in  1828.  The  ebb  and  flow  of  the  commercial 
tide  followed,  therefore,  substantially  the  same  course  in 
France  as  across  the  channel,  but  without  such  an  acute  dis- 
turbance.1 The  rate  of  discount  was  maintained  uniformly 
at  four  per  cent. 

The  Crisis  of  1837-39. 

The  crisis  of  1837  was  felt  most  severely  in  the  United 
States,  but  over-speculation  in  banks  and  joint  stock  com- 
panies affected  Great  Britain  and  the  Continent,  and  Great 
Britain  was  affected  also  by  her  large  loans  in  America. 
There  were  symptoms  of  a  panic  in  England  in  1832,  but 
they  arose  from  political  events,  aggravated  by  bad  manage- 
ment of  the  Bank  of  England,  and  did  not  present  the  phe- 
nomena of  a  genuine  economic  crisis.  The  government 
undertook  the  conversion  of  the  public  debt  at  three  and  a 
half  per  cent,  and  the  disturbance  thus  caused  in  the  money 
market  was  complicated  with  the  expiration  of  the  charter 
of  the  bank  and  the  political  convulsions  on  the  Continent. 
The  reform  bill  was  pending  in  Parliament  and  the  masses 
were  irritated  against  Wellington  and  the  conservative  min- 
istry for  their  opposition.  The  circulation  of  the  Bank  of 
England  was  much  less  than  in  1825  (about  ^16,800,000), 
but  the  coin  reserve  had  been  allowed  to  fall  below  ^5,000,- 
ooo.  The  attempt  to  create  a  political  run  upon  the  bank 


624         HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

caused  alarm  for  a  time,  but  was  repressed  without  serious 
results. J 

The  crisis  of  1837  i*1  tne  United  States  was  one  of  the  re- 
sults of  that  discounting  of  the  future  in  a  new  country, 
which  results  in  over-speculation  and  the  sinking  of  capital 
in  unproductive  enterprises.  Foreign  capital  became  available 
in  great  quantities  for  the  use  of  the  American  people  after 
the  recovery  from  the  crisis  of  1825  in  England,  and  specie 
imports  kept  company  with  an  excess  of  imports  of  merchan- 
dise, amounting  in  seven  years  to  $140,700,000,  as  evidence 
of  the  heavy  loans  which  Europe  was  willing  to  make  in  the 
United  States.2  The  fact  that  the  United  States  succeeded  in 
wiping  out  their  entire  public  debt  and  accumulating  a  sur- 
plus seemed,  among  the  financiers  of  European  countries, 
burdened  under  millions  of  debt  and  annual  interest  charges, 
to  be  a  proof  of  great  prosperity.3  The  success  of  the  Erie 
Canal  led  to  the  projection  of  many  similar  enterprises  in  the 
Middle  States  and  the  West ;  cities  were  laid  out  in  the  wil- 
derness, and  city  lots  sold  at  prices  which  in  conservative 
times  could  hardly  have  been  realized  in  New  York  and 
Philadelphia.  The  valuation  of  the  city  of  Mobile  in  1831 
was  $1,294,810;  it  rose  in  1837  to  $27>482>96l>  om"y  to  ^a^ 
in  1846  to  $8, 638, 250. 4  The  price  of  cotton  was  pushed  up, 
and  negroes  became  as  active  a  subject  of  speculation  in  the 
South  as  the  timber  lands  of  Maine  in  the  North. 


1  Juglar,  342. 

2  The  excessive  purchases  of  foreign  goods,  which  did  not  have  to 
be  paid  for  in  either  merchandise  or  bullion,  is  shown  by  the  fact  that 
the  imports  from  Europe  increased  from  $62,893,883  for  the  year  end- 
ing September  30,  1833,  to  $127,51 1,020  in  1836,  and  even  the  imports 
from  other  countries  increased  from  $38, 154,060  to  $49,068, 134.     This 
great  increase  in  consumption  was  offset  only  partially  by  the  in- 
crease in  exports  of  American  merchandise  to  Europe,  which  rose 
from  $56,556,837  in  1833  to  $96,413,449  in  1836,  while  other  exports 
slightly  fell  off.     The  reaction  was  striking  after  the  breaking  out  of 
the  crisis.     Imports  fell  during  the  year  ending  September  30,  1838, 
to  $62,017,575,  while  exports  from  the  United  States  to  Europe  fell 
only  to  $79,849,768. 

3  Juglar,  464. 

4  Shepard,  251. 


THE  EARLY  CRISES  OF  THE   CENTURY.  62$ 

Speculation  in  the  public  lands  ran  to  extravagant  limits. 
The  United  States  did  not  advance  the  price  of  public  lands 
beyond  one  dollar  and  a  quarter  per  acre,  which  had  been 
fixed  by  law  many  years  before.  The  speculators  bought 
of  the  government  at  this  fixed  price  and  sold  on  a  steadily 
rising  market.  The  increase  in  sales  of  public  lands  had 
been  comparatively  steady  and  healthful  up  to  1834,  when 
the  sales  were  4,659,218  acres  and  the  amount  received  was 
$6,099,981.  The  next  year  witnessed  the  sale  of  12,364,478 
acres  and  receipts  of  $15,999,804,  and  1836  witnessed  sales 
of  20,074,870  acres  and  receipts  of  $25,167,833.  The  specu- 
lative character  of  these  sales  is  indicated  by  the  steady 
decline  in  receipts  after  1837,  until  they  fell  in  1842  to  only 
$1,417,972.  *  President  Jackson  began  to  realize  in  1836  the 
true  character  of  the  rush  for  the  public  hands  and  en- 
deavored to  check  it  by  the  issue  of  the  famous  "Specie- 
circular."  The  circular  was  the  result  of  the  conclusion 
that  the  banks  organized  in  the  new  sections  of  the  West 
were  not  safe  enough  to  meet  the  requirement  of  existing 
law,  and  that  payment  for  lands  should  be  received  only  in 
specie  and  notes  of  specie  value.  These  banks  were  organ- 
ized in  many  cases  by  land  speculators,  who  issued  notes, 
borrowed  the  notes  and  bought  the  land.  The  notes  received 
for  sales  of  land  were  deposited  in  the  bank,  increasing  its 
resources,  and  were  then  borrowed  again  for  new  purchases 
of  land.  The  "  Specie  circular,"  issued  July  u,  1836,  put 
an  end  to  this  by  requiring  payments  in  coin  or  land  scrip, 
except  until  December  i5th  by  actual  settlers  or  residents  of 
the  States  in  which  the  lands  were  situated. 

The  shriek  of  rage  which  was  uttered  by  the  defeated 
speculators  was  echoed  by  the  political  enemies  of  Jackson, 
and  the  legend  still  has  believers,  that  the  crisis  of  1837  was 
the  result  of  no  other  causes  than  the  specie  circular  and  the 
deposit  of  public  funds  in  State  banks  instead  of  the  Bank  of 
the  United  States.  The  events  connected  with  the  discon- 
tinuance of  deposits  in  the  Bank  of  the  United  States  and 


1  Poor,  528. 

40 


626          HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

the  veto  of  the  charter J  undoubtedly  caused  some  degree  of 
financial  uneasiness  at  the  time,  but  the  causes  of  the  crisis 
of  1837  lay  deeper  than  merely  political  events.  The  infla- 
tion of  credit  which  has  been  attributed  by  some  to  the 
distribution  of  the  public  monies  among  the  State  banks 
had  already  begun  before  the  transfers  were  made,  and  the 
inflation  would  have  been  trifling  if  it  had  been  limited  to  the 
amount  of  the  deposits  at  the  time.  The  deposits  were  then 
only  $10,000,000,  and  it  is  obvious  that  they  would  not  have 
been  a  large  factor  in  a  healthy  money  market  and  were  a  still 
smaller  factor  in  a  period  of  inflated  values  and  extravagant 
speculation.  The  deposits  increased,  however,  from  $10,000,- 
ooo  in  1823  to  $41,500,000  in  1836. 

Congress  added  fuel  to  the  speculation,  and  greatly  em- 
barrassed the  Treasury  when  the  crisis  came,  by  the  policy 
of  distributing  the  surplus  revenues  among  the  States. 
Tariff  reductions,  although  recommended  by  President  Jack- 
son, were  not  made  with  sufficient  rapidity  to  prevent  the 
accumulation  of  a  surplus,  which  amounted,  on  January  i, 
1836  to  $26,749,803.  This  surplus  and  subsequent  accumu- 
lations up  to  January  i,  1837,  reserving  $5,000,000  for  the 
government,  were  ordered  by  the  Act  of  June  23,  1836,  to 
be  ' '  deposited  ' '  with  the  several  States  in  proportion  to 
their  representation  in  Congress.  Jackson  had  favored  a 
distribution  in  1829,  2  but  in  1836  had  come  to  see  the 
dangers  of  the  plan  and  only  reluctantly  permitted  the  bill 
to  become  a  law.  A  new  element  of  disturbance  was  pro- 
jected into  the  financial  situation  by  the  coinage  Act  of  1834, 
which  changed  the  ratio  of  value  of  gold  and  silver  from 
fifteen  to  one  to  sixteen  to  one,  in  order  to  promote  the 
circulation  of  gold. 3  It  was  the  desire  of  President  Jackson 
and  Senator  Benton  to  create  a  metallic  currency,  in  place 
of  a  bank-note  currency  resting  upon  insecure  foundations, 
and  it  was  provided,  in  the  bill  authorizing  the  deposit  of 

1  Vide  ch.  xiii. 

-  Knox,  169. 

3  The  measure  was  designed  to  make  a  market  for  the  gold  which 
was  then  being  mined  in  considerable  quantities  in  the  Southern 
Appalachian  range. 


THE  EARLY  CRISES  OF  THE  CENTURY.  62? 

the  surplus  with  the  States,  that  each  of  the  deposit  banks 
should  redeem  its  notes  in  specie  and  should  issue  no  notes 
after  July  4,  1836,  of  a  lower  denomination  than  $5.  The 
adoption  of  a  coinage  system  which  sent  silver  to  a  premium 
over  gold,  at  the  same  moment  that  it  was  proposed  to 
exclude  small  notes  from  circulation,  threatened  to  leave  the 
country  without  a  medium  for  small  payments,  but  the 
breaking  out  of  the  crisis  and  the  suspension  of  specie  pay- 
ments suspended  the  operation  of  the  new  conditions  before 
any  considerable  amount  of  gold  had  found  its  way  into 
circulation. 

Omens  of  trouble  were  already  in  the  air  in  the  opening 
months  of  1837.  Popular  meetings  were  held  in  New  York 
for  the  purpose  of  protesting  against  the  high  prices  of 
provisions  and  the  undue  inflation  of  bank  credits.  One  of 
these  meetings,  on  February  i4th,  became  riotous,  a  flour 
warehouse  was  gutted,  and  the  military  were  called  out  to 
preserve  order.1  The  commercial  crash  was  delayed  until 
April.  The  news  from  England  indicated  a  financial 
stringency  there  which  was  soon  felt  in  the  United  States. 
One  hundred  and  twenty-eight  failures  occurred  in  New 
York  between  April  ist  and  April  nth,  cotton  fell  nearly  fifty 
per  cent.,  the  banks  of  New  York  suspended  specie  pay- 
ments on  May  loth,  and  the  banks  throughout  the  country 
which  had  not  already  fallen  followed  the  example  of  New 
York  within  a  few  days.  The  deposit  banks  ceased  to  pay 
specie,  the  public  revenues  fell  off,  further  deposits  of  public 
monies  with  the  States  were  suspended,  and  on  May  i5th 
President  Van  Buren  called  an  extra  session  of  Congress  for 
September. a 

^hepard,  270. 

2  The  New  York  banks  resumed  specie  payments  on  May  10,  1838, 
and  most  of  the  other  banks  of  the  country  followed  on  July  ist. 
Early  resumption  was  strongly  championed  by  ex-Secretary  Albert 
Gallatin,  then  President  of  the  National  Bank  of  New  York,  who 
was  chairman  of  a  committee,  appointed  by  the  New  York  banks  as 
early  as  August  15,  1837,  to  confer  on  the  subject  with  the  bankers 
of  other  cities.  The  New  York  banks  would  probably  have  resumed 
much  earlier,  but  for  the  dilatory  policy  of  the  United  States  Bank  of 
Pennsylvania. — Stevens,  282-85. 


628          HIST  OR  Y  OF  MODERN  BANKS  OF  ISSUE. 

An  important  incident  of  the  crisis  was  the  fall  in  the  price 
of  cotton,  which  ultimately  resulted  in  a  serious  loss  to  the 
United  States  Bank,  which  was  now  operating  under  a  Penn- 
sylvania charter.     Heavy  obligations  had  been  incurred  by 
the  bank  abroad,  and  in  its  efforts  to  protect  the  New  York 
business  community   from  disaster   President   Biddle   and 
several  associates,  in  their  effort  to  meet  these  obligations, 
made  large  purchases  of  raw  cotton,  against  which  they  sold 
exchange  to  the  bank  and  thereby  placed  the  necessary  funds 
at  its  command  at  foreign  points. x     These  operations  were 
at  first  profitable  both  to  the  bank  and  to  Biddle  and  his 
associates,  but  high  prices  stimulated  the  creation  of  banks 
all  through  the  cotton  belt,  which  made  advances  to  the 
planters  and  undertook  to  sell  cotton  on  their  own  account 
in  Europe.     The  rise  of  the  Bank  of  England  discount  rate 
suddenly  curtailed  the  profits  of  many  of  these  banks  and 
the  Bank  of  the  United  States  went  to  their  rescue  in  order 
to  maintain  the  price  of  cotton.     Bank  shares  and  com- 
mercial paper  were  purchased  by  Biddle  at  a  discount  of 
more  than  twenty-five  per  cent.,  which  were  thrown  upon 
the  European  market  and  eagerly  snatched  up  at  par  by 
European  investors,  who  had  not  discovered  the  tottering 
condition   of  American  finance.     But   the    enterprise    was 
too  vast,   even   for    Biddle1  s    resources.     The    reserves    of 
cotton  were  brought  out,  old  stocks  in  the  hands  of  manu- 
facturers were  allowed  to  run  down,  consumption  diminished 
and  mills  reduced  their  output,  while  bale  upon  bale  con- 
tinued to   pour  upon   the   Liverpool   and  Havre   markets. 
The  House  of  Hottinguer  of  Paris  protested  Biddle' s  paper, 
the  Hopes  of  Amsterdam  broke  off  relations  with  him,  and 
the  price  of  cotton  tumbled,  in  common  with  that  of  other 
commodities.2 

Speculation  in  banks  and  joint  stock  companies  had 
reached  a  serious  point  in  England,  irrespective  of  large 
English  investments  in  America.  The  growth  of  the  specu- 


1  Vide  Opinion  of  the  Court  of  General  Sessions,  March  term,  1842, 
pp.  11-14. 

ajuglar,  462-65. 


THE  EARL  Y  CRISES  OF  THE   CENTUX  Y.  629 

lative  spirit  did  not  escape  the  attention  of  shrewd  judges  of 
the  situation,  and  L,ord  Wharncliffe  as  early  as  August  14, 
1834,  called  attention  in  Parliament  to  the  extension  of  joint 
stock  banks  and  the  insufficient  capital  with  which  they 
were  trading.1  The  matter  was  made  the  subject  of  a  Parli- 
amentary inquiry  in  May,  1836.  Mr.  Poulett  Thompson, 
President  of  the  Board  of  Trade,  took  part  in  the  debate 
and  said  that  he  had  kept  a  register  "  of  the  different  joint 
stock  companies,  and  of  the  nominal  amount  of  capital  pro- 
posed to  be  embarked  in  them.  The  nominal  capital  to  be 
raised  by  subscription  amounts  to  nearly  ^200,000,000  and 
the  number  of  companies  to  between  300  and  400."  "  The 
greater  part  of  these  companies,"  Mr.  Thompson  observed, 
"  are  got  up  by  speculators,  for  the  purpose  of  selling  their 
shares.  They  bring  up  their  shares  to  a  premium,  and  then 
sell  them,  leaving  the  unfortunate  purchasers,  who  are  foolish 
enough  to  invest  their  money  in  them,  to  shift  for  themselves. ' ' 
The  most  extravagant  expectations  of  railway  profits  and 
of  mining  profits  absorbed  private  capital  and  were  pre- 
paring the  way  for  a  crash,  when  the  failure  of  the  wheat 
crop  in  1836  inaugurated  a  drain  of  gold  from  the  Bank  of 
England. 

The  bullion  in  the  bank  in  March,  1836,  exceeded  ^8,000,- 
ooo.  From  this  date  it  steadily  declined,  but  it  was  not 
until  July  that  the  bank  raised  the  discount  rate  to  four  and 
a  half  per  cent,  and  in  August  to  five  per  cent.  The  Agricul- 
tural and  Commercial  Bank  of  Ireland  failed  in  November, 
and  a  run  began  upon  the  other  Irish  banks.  They  had 
strengthened  themselves  by  drawing  gold  from  the  Bank  of 
England  to  the  amount  of  ,£2,000,000  and  were  able  to  pay 
specie  on  demand,  but  the  distrust  was  so  great  that  Bank  of 
England  notes  were  taken  by  the  Bank  of  Ireland  only  in 
small  amounts  and  at  a  discount  of  two  shillings  and  six- 
pence in  the  pound.  The  Northern  and  Central  Bank  at 
Manchester,  with  a  capital  of  ,£800,000  and  with  forty 
branches,  appealed  to  the  Bank  of  England  for  help  in 


MacLeod,  Theory  and  Practice  of  Banking y  II.,  137. 


630          HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

December,  and  it  was  only  granted  on  condition  that  the 
institution  should  discontinue  all  its  branches  except  at 
Liverpool,  and  afterwards  that  it  should  discontinue  business 
after  February,  1837.'  The  bank  was  more  liberal  to  some 
of  the  large  houses  with  American  connections  and  eventu- 
ally aided  them  to  the  amount  of  ,£6,000,000. 

The  latter  half  of  the  year  1837  and  the  year  1838  showed 
an  increase  of  the  cash  reserve  of  the  Bank  of  England  and 
a  reduction  in  the  discounts  and  circulation.  The  access  of 
gold  to  England,  however,  was  due  to  the  abuse  of  credit  in 
America,  France,  and  Belgium  and  did  not  indicate  a  return 
of  sound  conditions  at  home.  Notwithstanding  the  danger, 
the  Bank  of  England  lowered  its  discount  rate,  November 
29,  1838,  from  four  to  three  and  a  half  per  cent.,  and  an 
increase  to  five  percent,  on  May  16,  1839,  was  insufficient  to 
arrest  the  downward  course  of  the  reserve.  The  suspension 
of  specie  payments  again  stared  the  bank  in  the  face,  offers 
were  made  to  sell  annuities,  some  public  stocks  were  sold, 
and  drafts  were  made  upon  Paris  for  ^"600,000  in  bills  of 
exchange.  The  bank  was  unable  to  reimburse  these  drafts 
when  they  matured  and  foreign  bankers  began  to  draw 
upon  London  for  coin.  Messrs.  Baring  and  Company  came 
to  the  rescue  and  made  an  agreement  with  several  bankers 
of  Paris  to  accept  bills  of  exchange  to  the  amount  of 
^2,000,000.  A  like  arrangement  with  the  bankers  of  Ham- 
burg procured  ^"900,000  more,  and  on  September  2,  1839, 
when  the  coin  and  bullion  were  at  ,£2,406,000,  the  decline 
was  arrested. 

The  Bank  of  France  was  fortunately  in  a  position  to  meet 
these  demands  in  1839,  for  its  own  coin  reserve  had  increased 
in  January  to  214,000,000  francs  ($41,400,000).  It  would 
have  been  less  easy  to  spare  gold  at  an  earlier  date,  for  the 
bank  had  only  105,000,000  francs  ($20,000,000)  in  its  reserve 
in  January,  1837,  and  demands  for  discounts  were  rapidly 
increasing  from.  Paris  and  the  country.  The  bank  was  com- 
pelled to  buy  8,000,000  francs  in  gold  and  to  import  10,000,- 


1  Gilbart,  I.,  306. 


THE  EARLY  CRISES  OF   THE   CENTURY.  631 

ooo  francs  in  gold  bullion.1  The  crisis  was  less  severe  in 
France  than  in  England  and  the  Bank  of  France  was  able, 
at  some  risk  to  commerce,  to  maintain  the  uniform  discount 
rate  of  four  per  cent.2  The  demand  for  coin  and  for  in- 
creased discounts  came  mostly  from  the  interior  of  France 
and  while  the  gold  flowed  rapidly  from  the  bank  into  the 
provinces  in  1836,  it  flowed  almost  as  rapidly  back  in  the 
second  half  of  1837.  The  suspension  of  the  Bank  of  Bel- 
gium in  November,  1838,  and  the  disasters  in  the  United 
States  led  to  an  increased  demand  for  accommodation  from 
the  Bank  of  France  and  discounts  rose  from  103,000,000 
francs  in  June,  1838,  to  228,000,000  francs  in  January,  1839, 
but  legitimate  demands  were  met  without  impairing  the 
coin  reserve. 

The  Crisis  of  1847. 

The  crisis  of  1847  was  so  severely  felt  in  Great  Britain 
and  France,  on  account  of  the  failure  of  their  crops,  that 
they  were  driven  to  pour  their  gold  and  silver  into  the  lap 
of  the  United  States  in  the  purchase  of  her  bounteous  har- 
vests, and  the  year  was  for  her  one  of  unusual  prosperity. 
The  value  of  the  exports  of  merchandise  from  the  United 
States  for  the  fiscal  year  1847  was  $T56,74i,598,  an  increase 
of  more  than  forty  per  cent,  over  any  preceding  year ;  the 
excess  of  exports  over  imports  was  $34,317,249,  a  balance 
never  again  attained  until  1876  ;  and  the  imports  of  gold 
and  silver  were  $21,574,931, — a  total  which  stood  substan- 
tially unchallenged  until  shortly  before  the  resumption  of 
specie  payments  in  1879.  This  great  prosperity  on  the 
western  shore  of  the  Atlantic  was  obtained  at  the  expense 
of  fever,  starvation,  and  death  on  the  eastern  shore.  A  long 
season  of  rain  and  wet  rotted  the  entire  potato  crop  of  Ire- 
land in  1845  and  1846  and  destroyed  the  food  of  a  people. 
The  Irish  peasant,  who  had  no  other  means  of  living,  was 
dying  literally  by  tens  of  thousands  among  the  marshes  and 
hovels  of  his  native  land.  Coffins  could  no  longer  be  pro- 

1  Juglar,  414. 

2  Courtois,  159. 


632          HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

vided  in  some  districts  and  the  coroner  refused  to  go  on  hold- 
ing inquests.  The  population  of  Ireland  was  found  when 
the  famine  was  over  to  have  shrunken  by  death  and  emigra- 
tion from  eight  millions  to  six  millions.1  Three-quarters  of 
a  million  of  Irish  immigrants  reached  the  United  States  in 
the  decade  ending  with  1850  and  nearly  a  million  followed 
in  the  next. 

The  great  demand  for  gold  to  pay  for  foreign  grain  was 
the  immediate  occasion  of  the  crisis  of  1847,  but  there  had 
been  also  a  great  transformation  of  circulating  into  fixed 
capital  in  the  building  of  railways,  and  the  effect  of  the  ex- 
port of  gold  was  much  intensified  in  England  by  the  opera- 
tion of  the  Bank  Act  of  1844.  This  act  did  not  accomplish 
its  original  purpose,  to  contract  domestic  circulation  in  the 
exact  measure  of  the  export  of  bullion.  Had  it  done  so, 
the  effect  would  have  been  even  more  disastrous  than  was 
actually  the  case  ;  but  it  accomplished,  at  a  time  when  it 
was  too  late  to  arrest  speculation,  a  needless  pressure  upon 
the  money  market  and  a  sharp  contraction  of  discounts. 
The  railway  mania  steadily  spread  in  Great  Britain  for 
several  years.  New  railway  capital  was  authorized  by  Par- 
liament in  three  years  to  the  amount  of  ^221,000,000  and 
the  amount  actually  expended  on  railways  in  two  and  a  half 
years  was  computed  at  ^76,39O,ooo.2  The  countries  of  the 
Continent  had  followed  Great  Britain  in  railway  expansion. 
Belgium  in  1845  na(^  343  miles  of  railway,  built  at  a  cost  of 
$29,000,000  ;  France  552  miles,  at  a  cost  of  $51,000,000,  with 
1900  miles  projected  at  a  cost  of  $150,000,000  ;  Germany, 
2000  miles  at  a  cost  of  $77,000,000,  with  2300  miles  pro- 
jected ;  and  the  United  States,  3688  miles  at  a  cost  of  $88,- 
000,000,  with  5624  miles  under  construction  at  an  estimated 
cost  of  $i34,ooo,ooo.3  The  effect  of  this  great  absorption  of 
the  savings  of  the  community  in  a  single  class  of  enterprises 
was  illustrated  in  an  incidental  way  when  Parliament  in 
1846  required  all  railway  companies  intending  to  apply  for 

1  McCarthy,  I.,  278-82. 

2  Report  of  the  Lords'  Committee,  Gilbart,  I.,  329-3°- 
3Levi,  303-304. 


THE  EARLY  CRISES  OF   THE  CENTURY.  633 

incorporation  to  lodge  ten  per  cent,  of  their  capital  within 
fifteen  days  after  the  beginning  of  the  Parliamentary  session. 
It  was  feared  that  the  notes  issued  under  the  Bank  Act  of 
1844  would  prove  insufficient  to  make  these  payments  and  it 
was  arranged  that  the  £  14, 000,000  found  to  be  required 
should  be  obtained  by  daily  payments  deposited  in  the  Bank 
of  England  and  immediately  loaned  out  again  for  further 
payments.1 

The  harvests  of  1842,  1843,  and  1844  were  abundant,  large 
savings  were  made  by  the  British  nation,  the  quantity  of 
capital  required  to  be  invested  in  goods  in  stock  was  re- 
duced by  improvements  in  the  means  of  transit,  and  bullion 
rapidly  accumulated  in  the  Bank  of  England.  Discount 
rates  at  the  bank  fell  as  low  as  one  and  three-quarters  per 
cent,  on  the  best  bills  and  after  some  fluctuations  stood  at 
three  per  cent,  from  August,  1846,  to  January  16,  1847. 
The  failure  of  the  potato  crop  in  Ireland  in  1845,  followed 
by  a  worse  failure  in  1846,  required  the  exportation  of  large 
quantities  of  bullion  to  pay  for  foreign  grain,  and  the  bullion 
holdings  of  the  bank  decreased  from  ^15, 163,000  on  Decem- 
ber 19,  1846,  to  ,£9,867,000  on  April  10,  1847.  The  bank- 
ing reserve  in  the  meantime  had  fallen  from  ,£8,864,000  to 
,£2,558,000.  A  panic  stared  the  market  in  the  face  for  a 
moment  and  discount  among  private  bankers  rose  to  ten  and 
twelve  per  cent.  The  rise  in  the  bank  rate,  however,  stopped 
the  flow  of  bullion  and  a  sum  of  ,£100,000  which  had  been 
actually  put  on  shipboard  for  America  was  relanded.2  The 
pressure  passed  off  for  a  time  and  the  bullion  in  the  bank  at 
the  end  of  June  had  increased  to  ,£10,526,000  and  the  bank- 
ing reserve  to  ,£5,625,000. 

The  relief  was  only  temporary.  A  series  of  heavy  failures 
came  crowding  on  each  other's  heels  in  August,  involving 
liabilities  of  ,£1,200,000  in  the  week  ending  August  i6th  and 
,£15,000,000  by  the  end  of  October.  Saunderson  &  Co.,  a 
leading  firm  of  bill  brokers,  stopped  payment  in  the  middle 


1  Gilbert,  I.,  335. 

2  MacLeod,  Theory  of  Credit,  II.,  796. 


634          HISTORY  OF  MODERN  BANK'S  OF  ISSUE. 

of  September,  heavily  involved  with  leading  houses  in  the 
corn  trade.  Firms  in  the  India  trade  were  crippled  by  the 
long  credits  afforded  and  were  compelled  to  suspend.  Mer- 
chants whose  own  business  was  sound  were  ruined  by  their 
reckless  speculations  in  railroad  securities.  The  directors 
of  the  Bank  of  England  realized  that  heroic  measures  were 
required  to  save  the  bank  and  on  October  2,  1847,  advanced 
the  bank  rate  to  five  and  a  half  per  cent,  and  refused  to 
make  advances  on  stock  or  on  Exchequer  bills.  The  bullion 
had  fallen  again  to  ,£8,565,000  and  the  banking  reserve  to 
^3,409,000.  The  refusal  to  make  advances  on  public  securi- 
ties caused  wild  excitement  on  the  stock  exchange,  a  fall  in 
the  price  of  Consols,  and  the  disappearance  of  coin  and 
bank-notes  into  private  hoards.  The  Bank  of  England  was 
reduced  to  the  choice  of  bringing  business  to  a  standstill,  by 
refusing  all  further  discounts  and  pulling  down  the  entire 
commercial  structure  in  a  shapeless  mass  of  ruins,  or  break- 
ing through  the  shackles  placed  upon  its  action  by  the  Bank 
Act  of  1844. 

The  government  waited  until  the  situation  was  desperate, 
in  the  hope  that  the  pressure  would  pass  away,  as  that  of 
April  had  done,  without  the  necessity  for  suspending  the 
law.  The  reserve  dropped  to  ^1,176,000  and  the  govern- 
ment finally  acted,  late  on  Saturday,  October  23d,  and  notified 
the  bank  that  they  would  seek  a  bill  of  indemnity  from 
Parliament  if  notes  were  issued  in  excess  of  the  limit  im- 
posed by  the  Act  at  a  rate  of  discount  not  less  than  nine  per 
cent.  The  effect  was  magical.  The  knowledge  that  money 
might  be  had  to  meet  demands  instantly  destroyed  the 
desire  for  it.  The  bank  prepared  ^"400,000  in  additional 
notes,  but  it  was  not  found  necessary  to  issue  them.  Notes 
which  had  been  hoarded,  under  the  impression  that  the 
limit  of  issues  fixed  by  the  Act  would  soon  be  reached  and 
all  relief  cut  off  from  the  business  community,  came  pouring 
from  their  hiding  places  ;  gold  which  had  been  stored  in 
safe  deposit  vaults  was  brought  back  to  the  banks  for  deposit, 
and  both  the  bullion  and  the  banking  reserve  of  the  Bank 
of  England  rapidly  returned  to  safe  proportions. 


THE  EARLY  CRISES  OF   THE   CENTURY.  635 

France  suffered  less  keenly  than  England  in  1846  from  the 
insufficiency  of  the  crops,  but  the  exportation  of  bullion, 
under  the  demands  of  the  London  market  and  in  payment 
for  grain,  carried  the  reserve  of  the  Bank  of  France  down 
from  252,000,000  francs  on  July  i,  1846,  to  80,000,000  francs 
on  January  I,  1847.  The  bank  was  besieged  for  discounts, 
purchased  gold  and  silver  in  the  provinces  at  a  premium,  and 
sold  20,000,000  francs  in  French  securities  to  the  Barings 
of  lyondon  for  gold.  The  crisis  was  so  intense  that  the 
management  of  the  bank  decided  on  January  14,  1847,  for 
the  first  time  in  twenty-seven  years,  to  raise  the  rate  of 
discount  from  four  to  five  per  cent.  The  outflow  of  specie 
ceased  and  the  reserve  rose  from  78,000,000,000  francs  on 
January  i5th  to  1 10,000,000  francs  on  March  i6th.  The  Em- 
peror of  Russia  came  to  the  rescue  of  the  bank  and  offered 
to  buy  French  public  securities  to  the  amount  of  50,000,000 
francs.1  The  bank  accepted  the  offer  and  these  securities 
went  to  Russia  in  payment  for  grain  in  place  of  the  bullion 
which  would  otherwise  have  been  exported.  It  was  well 
understood  in  France  that  the  efflux  of  gold  was  due  to 
foreign  payments  and  there  was  no  disposition  to  present 
bank-notes  for  redemption  in  specie  for  domestic  use.2  The 
bank  was  so  well  equipped  with  bullion  and  confidence  was 
so  fully  restored  that  France  was  little  affected  by  the  autumn 
pressure  in  England  and  discount  was  reduced  on  December 
27,  1847,  to  the  standard  rate  of  four  per  cent.  The  break- 
ing out  of  the  revolution  of  1848  arrested  the  development 
of  business,  and  led  the  bank  to  seek  the  suspension  of 
specie  payments  by  authority  of  the  government  for  the 
protection  of  its  metallic  reserve.  The  accumulation  of 
bullion  was  unprecedented  from  1848  to  1851  and  attained 
on  October  2,  1851,  626,000,000  francs,  which  was  about 
20,000,000  francs  in  excess  of  the  entire  circulation  of  bills. 


1Noel  I.,  in.  The  negotiations  were  opened  by  the  Russian 
ambassador  at  Paris,  Count  Kisselef,  and  a  deputy  governor  of  the 
bank  went  to  St.  Petersburg  to  conclude  the  transaction.  The  con- 
tract was  signed  March  17,  1847. 

2Juglar,  417. 


CHAPTER  XXIII. 

THE   LATER  CRISES  OP  THE  LAST  CENTURY. 

Growth  in  the  Popular  Understanding  of  Crises — The  Effect  of  the 
Gold  Discoveries  and  Railway  Building  in  1857  and  1866 — The 
Failure  of  Overend,  Gurney,  and  Co.  in  1866,  and  of  the  Barings 
in  1890 — The  Economic  Effects  of  the  American  and  Franco- 
Prussian  Wars  and  the  Long  Period  of  Depression  from  1873  to 
1879. 

THE  economic  crises  of  the  closing  half  of  the  nine- 
teenth century  were  of  wider  extent  than  some  of 
the  earlier  crises,  because  of  the  wider  area  and 
magnitude  cf  modern  commerce,  and  the  suffering  which 
they  inflicted  was  more  keen  ;  but  they  possessed  fewer  of 
the  characteristics  of  unreasoning  panic  than  the  earlier 
crises  of  the  century,  because  of  the  more  accurate  compre- 
hension of  the  laws  of  banking  which  has  been  diffused  in 
the  business  community.  The  panic  in  England  was  less 
intense  in  1857  than  in  1847,  an(^  *ne  serious  dangers  of  the 
Baring  failure  in  1890  were  warded  off  by  the  union  of  the 
Bank  of  England  and  the  great  financial  houses,  without 
any  outbreak  of  visible  alarm.  The  United  States  in  1893 
passed  through  an  equally  trying  experience,  and  runs  upon 
the  banks  by  depositors  were  several  times  feared,  but  no 
such  runs  took  place  except  in  cases  where  there  were  well- 
founded  reasons  for  distrust. 

The  Crisis  0/1857. 

The  crisis  of  1857  took  its  direction  from  two  of  the  car- 
dinal events  of  the  nineteenth  century, — the  gold  discoveries 

636 


THE  LATER   CRISES  OF   THE  CENTURY.  637 

in  California  and  Australia  and  the  great  extension  of  rail- 
ways. The  gold  discoveries  worked  a  revolution  in  the  pro- 
portions of  the  precious  metals  ^available  for  monetary  uses, 
such  as  had  only  been  worked  by  the  discoveries  of  the 
treasures  of  Mexico  and  Peru  more  than  three  centuries 
before.  The  gold  product  of  358  years,  from  1492  to  1850, 
had  averaged  only  about  $9,000,000  per  year,  *  when  it  was 
suddenly  swelled  to  an  average  of  $133,000,000  from  1851  to 
1860.  President  Buchanan  estimated  the  production  of  the 
United  States  alone  for  the  eight  years  ending  in  1857  at 
$400,000,000.  Prices  did  not  advance  in  proportion  to  the 
increase  in  the  volume  of  metallic  money,  because  they  were 
regulated  by  credit  and  because  a  large  part  of  the  new 
money  was  absorbed  by  the  lateral  expansion  of  commerce 
in  quantity,  but  enterprises  of  all  kinds  received  a  stimulus 
unheard  of  in  the  history  of  the  world. 

To  this  influence  of  the  doubling  of  the  supply  of  the  pre- 
cious metals,  as  if  by  magic,  was  added  the  influence  of  rail- 
way extension.  The  railway  mileage  built  in  the  United 
States  in  1856  was  3642  miles, a  and  the  construction  for  the 
nine  years  ending  with  1857  was  21,000  miles.  This  con- 
struction, forming  seven-ninths  of  the  entire  mileage  of  the 
country,  had  absorbed  $700,000,000,  largely  in  foreign  capi- 
tal. England  and  the  Continent  had  witnessed  a  similar 
absorption  of  circulating  capital.  Over  four  thousand  miles 
of  rail  way  had  been  built  in  Bngland  since  1850  at  an  ex- 
pense of  ^150,000,000,  doubling  the  mileage  of  the  country.8 
So  rapid  was  the  development  in  every  branch  of  American 
life  that,  in  the  language  of  Professor  Von  Hoist,  "It  was 


1  Prof.  Adolph  Sootbeer  gives  the  aggregate  production  from  1493 
to  1850  as  13,258,000,000  marks  ($3,150,000,000),  and  from  1851  to  1885 
as  17,810,000,000  ($4,250,000,000).—  Bimetallism  in  Europe,  Sen.  Ex. 
Doc.  34,  soth  Cong.,  ist  Sess.,  78.  The  production  from  1885  to  Dec. 
31,  1895,  was  about  $1,375,000,000. 

2  Sumner,  History  of  American  Currency,  180. 

3  These  figures  are  taken  from  Mr.  Rhodes'  History  of  the  United 
States  (III.,  53),  who  has  made  a  careful  compilation  of  the  essential 
facts  of  the  crisis  in  this  country. 


638          HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

more  and  more  lost  sight  of,  that  even  in  the  age  of  steam, 
time  must  remain  an  essential  factor  in  every  process  of  de- 
velopment." It  no  longer  seemed  absurd  to  project  railways 
into  the  wilderness,  in  the  confident  belief  that  they  would 
open  up  new  countries  and  create  traffic  where  none  existed. 
Immigration  lent  its  aid  to  the  natural  growth  of  population, 
and  the  American  people,  under  these  combined  influences, 
"worked  themselves  deeper  and  deeper  into  the  delusion 
that  the  fancy  could  scarcely  keep  pace  with  the  reality,  and 
were  thus  led  to  mould  the  reality  in  their  minds  in  accor- 
dance with  what  imagination  pictured  to  them."  l 

There  were  signs  of  a  tight  money  market  in  both  the 
United  States  and  England  for  several  years  before  1857. 
Bad  crops  and  the  diminution  of  foreign  investments  caused 
uneasiness  among  the  Western  banks  as  early  as  the  summer 
of  1853.  They  drew  heavily  upon  their  balances  in  New 
York  to  replace  the  capital  sunk  in  railway  enterprises,  and 


1  Von  Hoist,  VI.,  104.  It  was  argued  at  the  time  of  the  panic  of 
1857,  and  has  been  maintained  since,  that  the  crash  was  caused  by 
the  low  tariff  of  1846,  which  led  to  large  exports  of  specie  to  make 
payments  for  foreign  goods  and  drained  the  country  of  metallic  money. 
Mr.  Rhodes,  who  will  not  be  accused  of  partiality  to  the  administra- 
tion of  either  Polk  or  Buchanan,  says  that  "  in  this  reasoning  cause 
and  effect  are  confused,  and  in  part,  at  least,  inverted.  It  was  the  ex- 
port of  specie  which  increased  the  importations  of  merchandise,  and 
not  the  importations  of  merchandise  which  increased  the  export  of 
specie."  He  shows  that  during  the  nine  years  ending  June  30,  1857, 
the  excess  of  the  exports  of  specie  over  imports  was  $271,000,000,  and 
that  during  the  same  period  there  was  a  production  of  gold  in  the 
United  States  of  about  $477,500,000,  leaving  a  net  increase  of  specie 
of  about  $206,000,000.  The  net  increase  in  specie  in  circulation  shown 
by  the  Treasury  estimates  during  this  period  was  only  $148,000,000, 
the  remainder  having  been  absorbed  in  the  arts,  but  this  amount  was 
more  than  sufficient  for  American  monetary  uses,  and  such  export  of 
specie  as  occurred  probably  tended  to  restrain  speculation  rather  than 
stimulate  it.  Mr.  Rhodes  expresses  his  obligations  for  this  part  of  his 
history  to  Prof.  Edward  G.  Bourne  of  Adelbert  College.— History  of 
the  United  States,  III.,  51-52.  Prof.  Max  Wirth,  the  eminent  Ger- 
man historian  of  economic  crises,  makes  no  mention  of  the  tariff 
among  the  causes  of  the  crisis  of  1857. 


THE  LATER   CRISES  OF   THE   CENTURY.          639 

many  were  compelled  to  suspend  payment.  The  Crimean 
War  led  to  speculation  in  shipping  in  England  and  some 
perturbation  in  business  circles.  The  anticipation  of  trouble, 
however,  as  the  result  of  the  war,  made  money  lenders  cau- 
tious and  prevented  serious  embarrassment  until  the  summer 
of  1855.  The  Bank  of  England  in  that  year  suffered  a  seri- 
ous drain  of  bullion,  which  carried  its  supply  down  from 
,£18,169,000  on  June  23d  to  ^11,752,300  on  October  i3th. 
This  drain  continued,  in  spite  of  advances  in  the  discount 
rate  by  successive  steps,  from  three  and  a  half  per  cent,  dur- 
ing the  summer  to  six  per  cent,  on  October  i8th,  and  finally 
to  seven  per  cent,  on  November  8th.  The  volume  of  trade 
did  not  seem  to  yield  to  the  pressure  of  high  rates  of  inter- 
est, and  prices  continued  to  climb  upward, 1  but  the  bullion 
in  the  bank  was  kept  nearly  stationary  through  the  year 
1856.  The  tightness  of  the  money  market  continued  into 
the  summer  of  1857,  when  on  August  i7th  the  bullion  stood 
at  ^10,606,000  and  the  rate  of  discount  was  five  and  a  half 
per  cent. 

The  situation  in  the  United  States  was  complicated,  as  it 
was  in  France,  by  the  changes  in  the  metallic  circulation 
caused  by  the  great  production  of  gold.  Gold  took  the  place 
of  silver  as  the  overvalued  metal  at  the  coinage  ratio,  was 
invariably  chosen  by  debtors  for  payments,  and  silver,  hav- 
ing become  the  dearer  metal,  disappeared  from  circulation, 
in  spite  of  bimetallic  enactments,  under  the  relentless  opera- 
tion of  Gresham's  law.  The  Secretary  of  the  Treasury 
attempted  in  1853  to  relieve  the  contraction  thus  caused  by 
paying  for  silver  at  the  mint  in  gold,  which  would  be  added 
to  the  circulation.2  The  banks,  in  spite  of  their  rapid  in- 
crease, were  unable  to  keep  pace  with  the  demand  for  loan- 
able capital  which  resulted  from  the  fever  of  speculation.3 

1  Juglar,  363. 

2  Kinley,  175. 

8  The  number  of  banks  increased  from  715  in  1847  to  1416  in  1857, 
and  the  loans  and  discounts  from  1310,282,945  to  $684,456,887.  The 
increase  in  the  note  circulation  was  from  $105,519,766  to  $214,778,822. 
The  circulation  fell  in  1858  to  $155,208,344  and  the  specie  holdings  of 


640          HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

The  specie  reserves  of  the  New  York  banks  were  strength- 
ened for  a  time  by  government  bond  purchases  and  they 
were  able  to  expand  their  loans.  Foreign  capital  continued 
to  flow  into  the  United  States  and  the  bubble  of  speculation 
to  be  blown  to  the  extremist  tension. 

Conditions  were  ripe  both  in  Europe  and  America  for  a 
crash,  when  the  impulse  came  on  August  24,  1857,  fr°m  tne 
failure  of  the  Ohio  Life  Insurance  and  Trust  Co.,  of  Cincin- 
nati and  New  York,  with  reported  liabilities  of  $7, 000,000. 
A  panic  followed  on  the  New  York  Stock  Exchange,  stocks 
fell,  money  was  hoarded  and  loaned  only  at  extravagant 
rates,  deposits  began  to  disappear  from  the  banks,  and  late 
in  September  a  run  began  on  the  banks  of  Philadelphia. 
They  were  compelled  to  suspend  specie  payments  on  Sep- 
tember 26th  and  were  followed  by  the  New  York  City  banks 
on  October  13111.  The  early  part  of  October  had  witnessed 
the  failure  of  the  Illinois  Central  Railroad,  the  New  York 
and  Erie,  and  the  Michigan  Central,  and  the  run  upon  the 
New  York  banks  for  the  withdrawal  of  their  deposits  fol- 
lowed close  upon  these  events.1  Prices  of  commodities  tum- 
bled with  the  price  of  stocks  and  the  farmers  felt  the  pinch 
in  the  depreciation  of  wheat,  flour  and  pork  as  well  as  in 
the  fall  in  real  estate. 

Money  continued  tight  in  England  up  to  the  autumn  of 
1857  and  many  complaints  were  made  against  the  Bank  of 
England  for  the  high  rate  of  discount.  The  news  of  the 
failure  of  the  Ohio  Life  and  Trust  Co.  caused  intense  alarm 


the  banks,  which  had  not  suffered  during  the  crisis,  rose  from  $58,- 
349,838  in  1857  to  174,412,832  in  1858  and  to  $104,537,818  in  1859.  M. 
Juglar  points  out  that  it  was  not  increase  of  circulation  which  caused 
expansion  so  much  as  "the  attraction  of  deposits  by  high  interest 
and  the  lending  of  them  to  reckless  speculators." — Des  Crises  Com- 
merciales,  268. 

:The  New  York  banks  contracted  their  discounts  from  $122,000,000 
on  August  8th  to  $97,200,000  on  October  I7th.  The  constitution  of 
the  State  of  New  York  forbade  suspension  of  specie  payments  directly 
or  indirectly,  but  the  judges  of  the  Supreme  Court  met  and  agreed 
not  to  grant  any  injunction  unless  the  bank  appeared  to  be  insolvent 
or  guilty  of  fraud. — Sumncr,  History  of  American  Currency,  184. 


THE  LATER  CRISES  OF  THE  CENTURY.          641 

for  the  ,£80,000,000  of  English  money  which  was  believed 
to  be  invested  in  American  securities.  A  group  of  specula- 
tors added  to  the  alarm  in  I/Hidon  by  forming  a  combination 
to  "bear"  the  market,  by  finding  flaws  in  securities  and 
working  through  the  press  to  excite  general  distrust  and 
depress  prices.1  The  high  rates  of  interest  in  New  York  be- 
gan to  attract  gold  from  Hamburg  ;  the  Bank  of  France  lost 
25,000,000  francs  in  a  single  week,  and  the  bullion  in  the 
Bank  of  England  declined  to  ,£8,991,000  on  October  igth. 
The  great  house  of  Dennistoun  stopped  payment  on  Novem- 
ber 7th,  with  liabilities  of  nearly  ,£2, 000,000,  the  Western 
Bank  of  Scotland  closed  its  doors  two  days  later  under  ap- 
palling revelations  of  mismanagement  and  loss,  the  City  of 
Glasgow  Bank  suspended,  and  the  banking  reserve  of  the 
Bank  of  England  dropped  on  November  nth  to  ;£i, 462,000. 
The  money  actually  in  London  in  the  banking  department 
of  the  Bank  of  England  on  this  eventful  Wednesday  night 
consisted  of  ,£375,005  in  notes,  ,£310,784  in  gold  coin,  and 
,£44,046  in  silver  coin.  The  bank  could  not  have  held  out 
a  day  longer  under  the  Act  of  1844.  It  would  have  been 
obliged  to  suspend  discounts  not  later  than  Friday  and  this 
would  have  been  followed  by  a  run  for  their  reserves  on  the 
part  of  the  stock  banks,  the  bill  brokers,  and  the  private 
bankers,  who  had  deposits  at  the  Bank  of  England  to  the 
amount  of  ,£5,458,000.  At  the  last  moment  the  Bank  Act 
was  suspended.  A  letter  reached  the  bank  on  November 
1 2th,  authorizing  them  to  issue  notes  in  excess  of  the  legal 
limit,  provided  they  maintained  the  rate  of  discount  at  ten 
per  cent.  Public  excitement  was  suddenly  calmed,  but  the 
demand  for  discounts  continued  heavy  for  more  than  a  fort- 
night. The  bank  issued  ,£2,000,000  in  notes  above  the  stat- 
utory limit,  but  the  maximum  in  the  hands  of  the  public  was 
,£928,000  on  November  2oth.  The  remainder  were  added 
to  the  banking  reserve.  The  governor  of  the  bank  after- 
wards testified  that  there  was  less  acute  panic  in  1857  than 
in  1847,  but  that  the  real  commercial  pressure  was  more 


1  London  Times,  Sept.  10,  1857,  quoted  bv  Gilbart,  II.,  337. 
41 


642          HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

intense.  This  may  be  judged  from  the  fact  that  the  aggre- 
gate loans  by  discounts  and  advances  on  stocks  by  the  Bank 
of  England  were  ^12,645,000  from  November  i2th  to 
December  ist.1  Greater  caution  was  shown  than  on  former 
occasions  in  reducing  the  discount  rate,  and  it  was  main- 
tained as  high  as  five  per  cent,  in  1858  until  the  bullion  had 
returned  to  ^i5,ooo,ooo.2 

France  and  other  countries  of  the  Continent  suffered  in 
the  crisis  of  1857,  though  less  acutely  than  England  and 
America,  because  of  the  smaller  scope  of  their  commercial 
affairs.  The  establishment  of  the  Second  Empire  in  France 
gave  an  assurance  of  security  to  the  mercantile  classes, 
which  was  shaken  for  only  a  moment  at  the  outbreak  of  the 
Crimean  War.  Business  resumed  its  activity  when  it  ap- 
peared that  the  operations  of  the  war  would  be  confined  sub- 
stantially to  the  East  and  the  discounts  of  the  Bank  of  France 
rose  from  the  maximum  of  154,000,000  francs  ($29,000,000) 
in  1851  to  628,000,000  francs  ($121,000,000)  in  1857.  The 
bank  found  it  necessary  to  raise  the  discount  rate  to  six  per 
cent,  in  the  autumn  of  1856  and  found  its  specie  reserve  at 
Paris  reduced  in  January,  1857,  to  72,000,000  francs  ($14,- 
000,000).  One  of  the  surprising  features  of  the  panic  of 
1857  was  the  disappearance  of  gold  from  circulation  in  spite 
of  the  enormous  production  of  the  preceding  ten  years.  The 
Bank  of  France  was  continually  in  the  market  as  a  purchaser 
of  bullion  and  expended  14,000,000  francs  in  1855,  1856, 
and  1857  in  premiums  on  1,274,508,519  francs  ($250,000,000) 
in  gold  bullion.3 


1  I^evi,  404. 

2  MacLeod,  Theory  and  Practice  of  Banking,  II. ,  190. 

3Juglar,  422.  This  disappearance  of  gold  from  sight,  when  the 
quantity  in  the  world  available  for  monetary  uses  had  probably  in- 
creased more  than  fifty  per  cent,  in  ten  years,  throws  an  interesting 
light  on  the  suggestion  of  Mr.  Forssell,  the  Swedish  delegate  to  the  in- 
ternational monetary  conference  of  1892,  that  an  attempt  to  create  a  mon- 
etary union  wide  enough  to  prevent  exports  of  the  metal  under- valued 
iu  the  coinage  laws  would  be  followed  by  its  disappearance  within  the 
union. — Conference  Monetaire  Internationale,  Proems  Verbaux,  246. 


THE  LATER   CRISES  OF  THE   CENTURY.          643 

Hamburg,  with  her  purely  metallic  currency,  did  not  es- 
cape the  violence  of  the  storm.  The  rate  of  discount  reached 
nine  per  cent,  and  145  failures  occurred,  with  reported  liabili- 
ties of  $100,000,000. '  An  attempt  was  made  to  sustain  credit 
by  combination  among  the  leading  merchants,  but  it  failed 
and  resort  was  had  to  the  government,  which  borrowed  10,- 
000,000  marks  from  Austria  for  discounting  commercial  bills. 
The  Norwegian  and  Danish  governments  were  also  obliged 
to  contract  loans  for  the  benefit  of  the  mercantile  community, 
and  in  Sweden  the  National  Bank  was  authorized  to  borrow 
abroad  12,000,000  rix  dollars,  to  be  apportioned  among  the 
different  towns.2  In  Prussia  the  Jewish  houses  suffered 
more  than  the  banks,  and  complaint  was  made  that  the 
substantial  monopoly  of  the  Bank  of  Prussia  injured  credit 
by  the  contraction  of  the  volume  of  circulation.  The  laws 
against  usury  were  suspended  and  the  tfanks  were  author- 
ized to  discount  paper  secured  by  either  raw  materials  or 
manufactured  goods. 

The  Crisis  of  186^-66. 

The  years  following  the  outbreak  of  the  American  civil 
war  were  years  of  financial  disturbance  in  both  Europe  and 
America,  partly  as  the  result  of  influences  set  in  operation 
by  the  war,  and  partly  as  the  result  of  independent  influ- 
ences whose  effect  was  intensified  by  the  operation  of  the 
others.  Periods  which  witness  the  turning  of  business  from 
its  ordinary  courses  into  new  channels  are  always  periods  of 
uneasiness,  of  unusual  risks  and  of  speculative  tendencies. 
This  was  the  character  of  the  entire  period  from  1861  to 
1866.  The  great  discoveries  of  gold  which  had  lent  their 
brilliant  hue  to  the  dreams  of  American  business  men  be- 
fore the  crisis  of  1857  began  to  have  a  more  marked  effect  in 
Kurope  a  few  years  later.  Their  effect  was  heightened  by 
the  fact  that  at  the  close  of  1861  the  banks  and  Treasury  of 
the  United  States  suspended  specie  payments  and  gold  flowed 


1  Courtois,  235. 

2  Levi,  405. 


644          fit  STORY  OP  MODERN  BANKS  OF  ISSUE. 

with  an  accelerated  current  towards  Europe.  The  net  gold 
exports  from  the  United  States  in  1862  were  $21,532,892  ;  in 
1863,  $56,632,300;  in  1864,  $89,484,865  ;  and  in  1865,  $51,- 
882,805.  These  great  additions  to  the  monetary  supply  of 
Europe  produced  only  a  slight  effect  upon  prices,  *  but  they 
proved  a  great  stimulus  to  business  activity,  because  of  the 
means  of  conducting  exchanges  which  they  put  in  circula- 
tion in  countries  formerly  without  such  means.  The  effect 
in  France  is  described  by  an  eminent  French  writer,2  in  the 
following  terms : 

In  those  arrondissements  and  cantons  where  formerly  the  bill  was 
a  myth  and  the  gold  louis  a  phenomenon,  hundreds  of  thousands  of 
francs  and  even  millions  in  specie  and  in  bills  are  now  in  continuous 
rotation,  promoting  a  movement  of  transactions  which  grow  in  in- 
tensity and  extent  day  by  day.  They  constitute  a  potent  dike  against 
depression  and  depreciation.  The  ancient  possessor  of  monetary 
capital  is  neither  robbed  nor  defrauded  by  this  increase  in  the  quan- 
tity of  instruments  of  circulation,  whether  the  increase  consists  in 
real  gold  or  in  credit  gold  (or  suppose}.  On  the  contrary,  he  gains  as 
much  by  it,  more  perhaps,  than  the  general  public.  The  superior 
activity  of  exchanges  assures  to  the  aggregate  of  circulating  capital 
employment  more  fertile,  more  constant,  and,  inasmuch  as  it  stimu- 
lates production  and  renders  products  more  abundant  and  less  dear, 
it  even  increases  the  value  and  the  purchasing  power  of  the  pre- 
existing gold. 

The  news  of  war  in  America  had  an  immediate  effect  upon 
the  price  of  cotton  and  upon  the  I/ondon  money  market. 
The  first  influence  upon  the  Bank  of  England,  before  the 
suspension  of  specie  payments  in  the  United  States,  was  a 
loss  of  bullion  and  an  increase  of  the  discount  rate  on  Feb- 
ruary 14,  1 86 1,  to  eight  percent.  The  United  States  became 
smaller  purchasers  than  before  from  Europe  and  if  they  had 
remained  on  a  specie  basis  might  have  exacted  the  price  of 


1  Prof.  Jevons,  who  accepts  the  quantitative  theory  of  money  suffi- 
ciently to  make  a  careful  mathematical  calculation  of  the  effects  of 
the  new  gold,  declares  "  that  ten  per  cent,  may  be  taken  as  the  best 
approximation  which  we  can  get  to  the  rise  of  prices  between  1845- 
50  and  1860-62." — Investigations  in  Currency  and  Finance,  58. 

2  Horn,  264. 


THE  LATER   CRISES  OF   THE   CENTURY.          64$ 

their  exports  for  a  time  in  specie.  The  opposite  policy  caused 
bullion  to  flow  freely  into  the  Bank  of  England  and  per- 
mitted the  gradual  reduction  of  the  discount  rate  to  two  and 
a  half  per  cent,  in  January,  1862.  The  high  price  of  cotton 
still  required  specie  exports,  but  not  to  the  United  States. 
The  blockade  of  the  Southern  ports  compelled  English  mills 
to  seek  their  raw  materials  in  other  markets.  India,  Egypt, 
and  China  were  appealed  to,  and  it  was  not  possible  to  com- 
pensate this  new  trade  at  once  by  exports  of  merchandise. 
It  had  to  be  settled,  especially  in  the  case  of  India,  by  ex- 
ports of  silver  from  Great  Britain.1  France  felt  the  counter- 
stroke  of  this  movement  in  the  steady  export  of  silver  in 
exchange  for  gold.  Silver  was  more  valuable  as  bullion  than 
at  the  ratio  fixed  by  the  French  coinage  laws  and  was  sold 
at  a  premium  for  gold  imported  from  England  and  the 
United  States.  The  Bank  of  France  was  driven  to  making 
its  redemptions  in  gold,  in  order  to  prevent  a  run  for  silver. 
The  bank  not  only  exchanged  50,000,000  francs  in  silver  for 
an  equal  sum  in  gold,  at  the  coinage  ratio,  with  the  Bank  of 
England,  but  in  November,  1860,  effected  a  like  exchange 
of  30,000,000  francs  with  Russia  and  in  July,  1861,  of  6,000,- 
ooo  francs  with  the  Bank  of  Italy.2 

The  reduction  of  the  cotton  supply,  the  derangement 
caused  by  the  new  supplies  of  gold,  and  the  accumulation  of 
capital  in  Great  Britain  as  the  result  of  the  extended  use  of 
machinery,  gave  a  feverishness  and  speculative  character  to 
the  money  market  which  recalled  the  manias  of  1825  and 
1847  in  Great  Britain  and  of  1837  and  ^57  *n  the  United 
States.  One  of  the  new  elements  which  entered  into  the 
problem  in  Great  Britain  was  the  creation  of  companies  of 


1  The  net  imports  of  silver  into  India  for  the  four  years  ending 
March  31,  1866,  were  54,094,337  tens  of  rupees,  or  13,523,584  tens  of 
rupees  per  year,  while  the  bills  on  India  sold  by  the  home  govern- 
ment were  29,409,469  tens  of  rupees,  or  7,352,368  tens  of  rupees  pel- 
year.     The  annual  average  for  the  five  years  ending  with  1860  was 
10,072,495  tens  of  rupees  in  silver  and  992,569  in  bills,     The  ten  of 
rupees  was  about  equal  to  ^i, 

2  Juglar,  426. 


646         HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

limited  liability.  Such  companies  were  only  created  by 
special  charter  prior  to  1855,  and  it  was  not  until  after  the 
amendment  of  the  Companies'  Act  in  1862  that  their  crea- 
tion attained  the  proportions  of  a  mania.  A  new  form  of 
financial  enterprise  which  developed  was  the  creation  of  stock 
companies  to  furnish  funds  for  new  enterprises  upon  pledge 
of  their  stock.  A  proposed  railway  would  not  await  the 
slow  process  of  placing  its  stock  and  bonds  among  investors, 
in  order  to  obtain  funds  to  begin  construction,  but  would 
deposit  these  securities  with  a  finance  company,  which  would 
agree  to  accept  its  debts  for  a  specified  sum.  The  immediate 
service  rendered  by  the  finance  company  was  simply  the  use 
of  its  name,  and  the  dangers  of  this  method  of  financing  did 
not  become  obvious  until  these  long-dated  acceptances  began 
to  press  upon  the  market.  The  finance  companies  were  able 
to  sell  their  own  shares  at  high  prices  and  thus  obtained  the 
funds  with  which  to  make  advances  to  the  railways  and 
construction  companies.1 

This  new  method  of  financing,  through  great  capitalists 
and  banking  companies,  was  legitimate  within  the  limits  of 
the  strength  of  the  guaranteeing  companies,  and  the  pros- 
pects of  the  new  enterprises,  and  it  afforded  a  method  of  set- 
ting in  operation  at  once  enterprises  for  which  the  capital 
could  not  formerly  have  been  found  without  appealing  to  the 
clumsy  methods  of  government  finance.  The  new  system 
was  employed,  however,  without  wisdom  and  sometimes 
without  honesty  during  the  sixties  and  it  soon  brought  the 
inevitable  crash.  One  of  the  most  conspicuous  of  the  new 
finance  houses  was  that  of  Overend,  Gurney,  and  Co.,  which 
made  investments  in  railways  in  Great  Britain,  in  cotton  in 
the  United  States,  and  in  new  enterprises  in  India.  The 
company  commanded  the  unlimited  confidence  of  the  public, 
because  of  the  high  credit  of  the  private  firm  which  was 
turned  into  a  limited  company  in  July,  1865.  The  firm  was 
already  in  debt  at  that  time  to  the  amount  of  ^2,970, 168  and 
the  methods  by  which  this  money  had  been  lost  were  reck- 

1 1/evi,  462. 


THE  LATER   CRISES  OF   THE   CENTURY.  647 

lessly  continued  by  the  limited  company.  The  very  confi- 
dence reposed  in  the  company  was  to  some  extent  the  cause 
of  its  later  fall,  for  it  invited  such  large  deposits  that  use  had 
to  be  found  for  them  at  the  expense  of  safety. 

The  craze  for  limited  companies  increased  their  number  in 
England  within  a  few  years  by  nearly  three  hundred,  with  a 
nominal  capital  of  ,£504,000,000.  Many  were  abandoned 
before  starting,  others  went  into  bankruptcy,  and  the  project- 
ors of  some  disappeared,  leaving  no  record  behind  them. 
The  deposits  in  the  London  joint  stock  banks  increased  from 
£43,  000,000  in  1860  to  ^91,000,000  in  1864,  and  the  country 
and  private  banks  probably  held  on  the  latter  date  ,£20,000,- 
ooo  more.  A  large  part  of  these  deposits  consisted  of  ac- 
ceptances, which  were  confounded  indiscriminately  with  cash 
and  credits. '  France  had  entered  upon  the  policy  of  "fi- 
nancing," under  the  encouragement  of  Napoleon  III.,  even 
in  advance  of  Kngland,  and  her  great  Societe  de  Credit  Mobi- 
lier  for  several  years  paid  tempting  profits  and  was  the  model 
of  similar  creations  across  the  channel.2  But  France  and  the 
Continent  met  their  crisis  in  1864.  The  rise  of  prices  was 
arrested  in  January  of  that  year  and  the  Bank  of  France,  by 
keeping  its  discount  rate  two  per  cent,  below  that  in  Lon- 
don, was  obliged  to  purchase  gold,  from  January  to  Novem- 
ber, to  the  amount  of  221,000,000  francs.  Discounts  fell  off 
and  business  for  the  next  six  years  was  kept  within  conser- 
vative limits  by  the  fear  of  war  and  the  political  uncertainties 
attending  the  decadence  of  the  Second  Kmpire.  3 

Deficient  crops  added  their  influence  in  1862  to  high  prices 
for  cotton  to  create  a  balance  of  trade  adverse  to  Kngland, 
but  it  was  not  until  the  close  of  1863  that  the  exchanges  be- 
came adverse,  the  metallic  reserve  of  the  Bank  of  England 
fell  to  ,£13,000,000,  and  the  discount  rate  was  gradually 
raised,  until  in  December  it  stood  at  eight  per  cent.  Bullion 
began  to  flow  back  into  the  bank,  the  rate  was  reduced, 


1  Juglar,  385. 

2  Levi,  461. 

3  Courtois,  255. 


648          HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

speculation  revived,  and  a  new  increase  to  nine  per  cent,  be- 
came necessary  late  in  April,  1864.  There  was  another  lull 
until  the  autumn,  when  the  prospect  of  peace  in  the  United 
States  caused  a  tumble  in  cotton  and  a  smaller  fall  in  prices 
of  all  commodities.  The  bank  rate  was  again  advanced  to 
nine  per  cent,  in  September,  there  was  an  increase  of  £2,- 
500,000  in  discounts,  and  the  pressure  for  ready  money  was 
so  intense  that  Consols  fell  from  89  to  87.  The  year  1864 
witnessed  in  a  sense  two  crises  in  England, — the  first  result- 
ing in  the  liquidation  of  the  smaller  tradesmen,  the  second 
involving  the  great  capitalists.  The  liquidation  of  both  these 
classes  was  completed  on  the  Continent  in  1864.  The  effects 
of  the  crisis  crossed  the  oceans  to  Brazil  and  Australia  and 
if  they  were  not  felt  in  the  United  States  it  was  because  the 
events  of  the  war  interrupted  the  regular  movements  of  the 
economic  system.  Liquidation  was  not  fully  completed  in 
England  in  the  case  of  the  great  financiers  and  the  spring  of 
1866  witnessed  an  after-clap  more  severe  in  its  effects  than 
the  crisis  of  1864. 

The  first  gust  of  the  storm  of  1866  was  the  failure  of  the 
Joint-Stock  Discount  Company  in  February,  which  was  fol- 
lowed in  March  by  the  suspension  of  Earned 's  Bank  of 
Liverpool,  with  liabilities  of  ^3, 500,000.'  The  discount 
rate  of  the  Bank  of  England,  which  had  fallen  to  six  per 
cent.,  was  raised  to  seven  per  cent,  on  May  3d,  eight  per 
cent,  on  May  8th,  nine  per  cent,  on  May  gth,  and  ten  per 
cent,  on  May  loth.  It  was  on  the  evening  of  the  last  named 
day,  after  banking  hours,  that  the  news  spread  of  the  great- 
est failure  which  had  ever  taken  place  in  England.  An 
action  was  pending  in  the  courts  against  the  Mid- Wales 
Railway  Company,  to  recover  ,£60,000,  accepted  by  them 
and  held  by  the  great  house  of  Overend,  Gurney,  and  Co. , 
and  two  other  firms.  Judgment  was  delivered  on  May  Qth, 
to  the  effect  that  the  railway  company  had  no  right  to  accept 
the  bills  and  that  they  were  of  no  validity.2  The  decision  of 


1  Gilbart,  II.,  308. 

*  MacLeod,  Theory  of  Credit,  II.,  832. 


THE  LATER   CRISES  OF   THE   CENTURY.  649 

the  court,  coming  at  a  season  of  growing  alarm,  caused  a  run 
upon  Overend,  Gurney,  and  Co.,  by  depositors,  and  on  the 
afternoon  of  May  loth  the  firm  suspended  with  liabilities  of 
^18,727,915. ' 

The  next  day,  May  nth,  known  as  "  Black  Friday,"  was 
long  memorable  in  English  financial  history.  Lombard 
Street  became  impassable  with  the  surging  crowd  and  ex- 
travagant rumors  assailed  the  reputations  of  the  strongest 
houses.  The  Bank  of  England  extended  accommodations 
during  the  day  in  loans  and  discounts  to  an  amount  exceed- 
ing ^4,000,000,  and  the  banking  reserve  was  reduced  close 
to  ^3,000,000.  The  Chancellor  of  the  Exchequer  announced 
these  facts  in  the  evening  in  the  House  of  Commons  and 
stated  that  the  government  had  addressed  a  letter  to  the 
bank,  authorizing  the  suspension  of  the  Act  of  1844.  The 
announcement  was  received  with  cheers  and  the  news  had  a 
marked  effect  in  mitigating  the  panic  the  next  day.  The 
decision  to  authorize  the  extra  issue  was  not  reached  until 
midnight,  and  a  deputation  from  the  bankers  waited  upon 
the  Chancellor  while  the  House  was  in  session.  One  of  the 
representatives  of  the  joint  stock  banks  is  reported  to  have 
said  to  the  representative  of  the  Bank  of  England,  "  I  can 
draw  a  couple  of  checks  to-morrow  morning  which  will  shut 
you  up  at  once. ' '  *  The  letter  of  the  government,  signed  by 


1  These  figures  are  taken  from  the  report  of  the  liquidators  at  a 
meeting  for  dissolving  the  company,  held  in  London  on  November 
16,  1893.     It  appeared  that  ^"8, 266,048  of  the  liabilities  was  on  account 
of  bills  re-discounted  under  the  guarantee  of  the  company  and  ,£"6,018,- 
835  was  due  creditors  holding  security.     The  proved  claims  were 
finally  reduced  to  ^4,913,382,  including  interest,  and  they  were  paid 
out  of  the  proceeds  of  amounts  realized  from  bills  of  exchange  and 
other  credits  to  the  amount  of  ^1,982,289  ;  from  assets  of  the  old  firm, 
^"688,561  ;  separate  estates  of  the  partners  of  the  old  firm,  ^909,870  ; 
cash  and  interest  on  investments,   ^"60,273  ;    and  calls  of  ^25  per 
share  upon  the  shareholders,  ,£"2,088,286.     The  liquidators  were  en- 
abled to  return  ^626,945  to  the  contributories,  and  the  various  law 
costs  and  expenses  of  the  twenty-seven  years  of  liquidation  were 
^188,953.— London  Bankers'  Magazine,  Dec.,  1893,  I/ VI.,  809. 

2  Gil bart,  II.,  3*9- 


650          HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

Lord  John  Russell  and  Mr.  Gladstone,  contained  the  following : 

If,  then,  the  directors  of  the  Bank  of  England,  proceeding  upon 
the  prudent  rules  of  action  by  which  their  administration  is  usually 
governed,  shall  find  that,  in  order  to  meet  the  wants  of  legitimate 
commerce,  it  be  requisite  to  extend  their  discounts  and  advances  upon 
approved  securities,  so  as  to  require  issues  of  notes  beyond  the  limits 
fixed  by  law,  Her  Majesty's  Government  recommend  that  this  neces- 
sity should  be  met  immediately  upon  its  occurrence,  and  in  that 
event  they  will  not  fail  to  make  application  to  Parliament  for  its 
sanction. 

No  such  discount  or  advance,  however,  should  be  granted  at  a  rate 
of  interest  less  than  ten  per  cent.,  and  Her  Majesty's  Government 
reserve  it  to  themselves  to  recommend,  if  they  should  see  fit,  the  im- 
position of  a  higher  rate.  After  deduction  by  the  bank  of  whatever 
it  may  consider  to  be  a  fair  charge  for  its  risk,  expense  and  trouble, 
the  profits  of  these  advances  will  accrue  to  the  public. 

The  effect  of  the  suspension  of  the  Act  of  1844  was  so 
marked  that  it  appeared  the  next  day,  which  was  Saturday, 
as  if  the  crisis  was  at  an  end.  The  pressure  upon  the  banks 
ceased  for  the  moment,  and  the  Bank  of  England  did  not 
find  it  necessary  to  use  the  authority  to  issue  notes  beyond 
the  legal  limits.  The  demands  for  discount  continued  large, 
but  were  met  from  the  deposits,  which  were  poured  freely 
into  the  bank  by  the  outside  bankers  when  they  were  assured 
that  their  appeals  for  notes  would  be  honored.  Large  com- 
mercial failures  began  again,  however,  during  the  week, 
which  imperilled  the  banks  holding  their  paper  and  led  to 
new  demands  by  depositors.  The  Bank  of  London  paid  out 
fifty  per  cent,  of  its  deposits  in  cash  and  was  obliged  to  stop, 
with  liabilities,  according  to  its  last  balance  sheet,  of  ,£4,335, - 
877.  The  Consolidated  Bank  came  to  its  rescue,  but  was  in 
its  turn  exhausted.  The  Agra  and  Masterman's  Bank,  with 
wide  connections  in  India  and  the  Bast,  and  obligations  of 
^"15,582,002,  was  also  compelled  to  suspend  payments.  These 
banks  had  amole  assets,  but  were  unable  to  convert  them 
into  bank-notes  and  cash  rapidly  enough  to  meet  the  de- 
mand of  their  depositors.  The  magnitude  of  the  demands 
upon  the  Bank  of  England  after  the  authority  was  given  to 
suspend  the  Bank  Act,  may  be  judged  from  the  debate 


THE  LATER   CRISES  OF   THE   CENTURY.  6$  I 

which  took  place  in  the  House  of  Commons  on  the  evening 
of  May  i yth.  The  Chancellor  of  the  Exchequer  stated,  in 
reply  to  a  number  of  interrogations  : 

The  advances  made  by  the  Bank  of  England  on  government 
securities  on  Friday,  the  day  of  the  panic,  amounted  to  ,£919,000,  on 
Saturday  to  ,£"747,000,  and  on  three  subsequent  days  various  amounts, 
making  up  the  total  amount  advanced  on  these  securities  in  five  days 
to  ^2,874,000.  Then  with  regard  to  the  accommodation  of  commerce 
in  general,  the  best  measure  that  can  be  given  of  the  manner  in 
which  the  bank  has  exercised  its  functions  is  shown  in  this  : — that  it 
has  made  advances  upon  bills  and  has  discounted  bills  to  the  extent 
of  ,£9,350,000,  making  a  total  of  advances  and  discounts  in  five  days 
of  ^12,225,000. 1 

The  rate  of  ten  per  cent,  at  the  Bank  of  England  was  main- 
tained from  May  nth,  to  August  6th,  and  distrust  of  Eng- 
lish investments  was  so  keen  that  this  high  rate  failed  for  a 
time  to  attract  foreign  capital  from  countries  where  interest 
rates  ruled  much  lower.  The  rate  of  the  Bank  of  France 
continued  for  months  at  four  per  cent,  and  the  coin  reserves 
of  the  bank  remained  unimpaired.2  This  circumstance  was 
seized  upon  by  critics  of  the  rule  of  controlling  the  flow  of 
bullion  by  the  discount  rate  as  proof  that  the  rule  was  not 
based  upon  sound  economic  law.  The  simple  truth  was  that 
the  credit  of  English  finance  was  shaken  to  its  centre.  A 
high  rate  of  interest  ceases  to  attract  when  grave  doubt  ex- 
ists whether  the  principal  will  ever  be  repaid.  England  paid 
the  penalty  for  the  wide  ramification  of  her  credit  system, 
and  the  severe  shock  which  it  received  in  1866,  in  an  almost 
universal  fear  that  her  great  banks  and  finance  companies, 
even  the  Bank  of  England  itself,  were  on  the  verge  of 
bankruptcy.  The  prevalence  of  a  ten  per  cent,  rate  for 

'Gilbart,  II.,  313- 

2  Liquidation  in  France  had  already  taken  place,  in  anticipation  of 
war,  and  the  suspension  of  specie  payments  in  Italy  sent  large  quanti- 
ties of  bullion  over  the  Alps.— MacLeod,  Theory  and  Practice  of  Bank- 
ing, II.,  196-97.  M.  Horn  endeavors  to  trace  the  low  rates  in  France  to 
the  agitation  there  against  the  monopoly  of  the  Bank  of  France,  but 
if  such  an  influence  operated,  it  was  evidently  only  because  other  con- 
ditions concurred  to  make  low  rates  safe.  —La  Liberte  des  Banques,  446. 


652          HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

three  months  was  in  itself  a  heavy  fetter  upon  trade  and 
strengthened  the  belief  that  there  was  something  funda- 
mentally wrong  with  English  banking.  The  distrust  abroad 
was  profound  enough  to  justify  for  a  moment  the  phrase  of 
Sir  Stafford  Northcote,  that  there  was  "a  run  upon  Eng- 
land," and  to  wound  the  national  pride  with  the  unaccus- 
tomed fear  that  L,ondon  was  about  to  lose  her  pre-eminence 
over  the  money  markets  of  the  world  . l 

In  the  presence  of  such  fears,  an  economic  law  which 
would  operate  under  normal  conditions  of  credit  was  tem- 
porarily suspended,  just  as  in  the  past  few  years  foreign 
capital  has  been  persistently  withdrawn  from  the  United 
States,  in  spite  of  tempting  opportunities  for  investment, 
because  of  the  fear  that  they  would  abandon  the  gold  stan- 
dard. The  cherished  "convertibility  of  the  bank-note" 
did  not  prevent  the  suspicion  abroad  that  the  British  govern- 
ment intended  to  establish  forced  legal  tender,  and  its 
intervention  to  permit  the  suspension  of  the  Bank  Act  of 
1844  was  interpreted  among  those  not  familiar  with  the 
English  banking  system  as  a  step  in  that  direction.  The 
Earl  of  Clarendon  gave  official  testimony  to  the  gravity  of 
the  situation,  without  accomplishing  much  to  relieve  it,  by 
issuing  a  circular  letter  to  the  British  embassies  throughout 
Europe,  stating  that  "Her  Majesty's  government  have  no 
reason  to  apprehend  that  there  is  any  general  want  of  sound- 
ness in  the  ordinary  trade  of  this  country  which  can  give 
reasonable  ground  for  anxiety  or  alarm,  either  in  this  coun- 
try or  abroad."8  Distrust  at  home  had  not  at  any  time 
extended  to  the  solvency  of  the  Bank  of  England,  after  the 
directors  were  authorized  to  borrow  from  the  reserve  in  the 
issue  department,  and  the  bullion,  never  below  ;£i  1,800,000, 
rose  in  December  to  ^19,200,000.  The  discounts,  which  had 
risen  during  the  acute  stage  of  the  panic  to  ,£33, 400,000, 
fell  gradually,  with  liquidations  and  the  slackening  of  busi- 
ness, to  ^"19, 100,000. 


1  Wolowski,  La  Banque  d* Angleterre,  etc.,  133. 
9  I^evi,  471, 


THE  LATER   CRISES  OF   THE   CENTURY.  653 

The  Depression  of  1873-79. 

The  long  period  of  depression  which  began  with  panics  in 
Austria  and  the  United  States  in  1873,  and  which  had  hardly 
terminated  six  years  later,  followed  some  of  the  most  re- 
markable experiences  of  the  waste  of  national  resources, 
the  sinking  of  capital,  and  changes  in  the  economic  order 
which  the  world  has  ever  seen.  National  resources  were 
wasted  like  water  in  three  great  wars, — that  of  Secession  in 
the  United  States,  that  of  Italy  against  Austria  in  1866,  and 
that  of  France  against  Germany  in  1870.  The  direct  cost 
of  the  American  war,  exclusive  of  pensions,  was  estimated 
at  more  than  $5, 500, 000,000,  to  the  government  of  the 
United  States  alone,  exclusive  of  the  cost  to  the  South,  the 
injury  to  private  property,  and  the  drain  upon  the  productive 
power  of  the  country.1  The  cost  of  the  Franco-Prussian 
War,  brief  as  its  military  operations  proved  to  be,  was  esti- 
mated at  a  total,  direct  and  indirect,  of  $2,700,000,000,  of 
which  $2, 125,000,000  was  the  share  of  France  and  $575,000,- 
ooo  the  share  of  Germany.2  The  effect  of  an  important  war 
upon  credit  is  to  compel  a  forced  liquidation  of  business 
transactions  in  advance  of  the  time  which  would  be  set  by 
the  normal  movements  of  a  credit  cycle.  If  this  was  the 
case  during  the  Napoleonic  wars,  it  has  been  more  strikingly 
the  case  under  modern  conditions,  with  the  great  expansion 
of  credit  which  they  have  involved.  The  United  States, 
having  escaped  the  crisis  of  1866  by  the  forced  liquidations 
of  1860  and  1 86 1,  was  ripe  for  an  explosion  in  1873  ;  while 
France,  having  been  forced  to  liquidation  in  1870,  felt  only 
the  ripples  of  the  crisis  of  1873,  which  were  wafted  back 
from  the  storm  in  other  countries. 

The  absorption  of  capital  in  great  enterprises  during  the 
ten  years  prior  to  1873  was  as  great  as  its  waste  in  war.  The 
average  annual  increase  of  railways  in  the  United  States  from 
1860  to  1867  was  I311  miles.  The  increase  in  1869  was 
4953  miles;  in  1870,  5690  miles;  in  1871,  7670  miles;  in 

1  Bolles,  III.,  244. 

2  Giffen,  I.,  76. 


654          HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

1872,  6167  miles  ;  and  in  1873,  after  the  panic  had  broken, 
3948  miles. 1  The  United  States  did  not  stand  alone  in  rail- 
way expansion.  In  Russia,  a  system  of  12,000  miles  of 
railway  had  been  almost  entirely  created  since  1868 ;  in 
Austria,  eight  years  had  witnessed  an  increase  from  2200  to 
6000  miles  ;  and  in  South  America,  nearly  $200,000,000  of 
English  capital  had  been  borrowed,  mostly  for  railway  enter- 
prises.2 The  result  of  this  network  of  new  lines  was  the 
opening  of  great  producing  areas,  which  laid  down  their 
harvests  in  Liverpool  and  Hamburg  at  prices  which  crushed 
competition,  forced  down  the  prices  of  English  and  German 
agricultural  lands,  and  threatened  the  earnings  of  the  laborer. 
The  great  war  indemnity  paid  by  France  to  Germany  ac- 
cumulated such  a  surplus  of  loanable  capital  in  the  latter 
country  that  new  manufacturing  industries  sprung  up  all 
over  the  Empire,  which  soon  outran  the  demands  of  domes- 
tic consumption,  and  the  agricultural  population  flocked 
rapidly  from  the  country  to  the  cities.  In  Prussia  alone 
687  new  joint  stock  companies  were  founded  between  Janu- 
ary i,  1872,  and  July  i,  1873,  with  an  aggregate  capital  of 
$481,045,000.  The  construction  of  the  Suez  Canal  was  com- 
pleted in  1869,  destroying  the  value  of  much  pre-existing 
shipping,  and  the  development  of  railway  building  gave 
extraordinary  activity  to  mining,  forced  up  the  prices  of 
iron  and  resulted  in  the  establishment  of  many  new  foundries 
in  Great  Britain  and  the  United  States.  To  these  causes  of 
the  loss  and  absorption  of  capital  had  to  be  added,  during 
the  period  of  liquidation,  the  effect  of  bad  crops  in  Great 
Britain  and  the  destruction  of  vineyards  in  France  by  the 
ravages  of  the  phylloxera,  to  the  value  of  $2,ooo,ooo,ooo.3 
The  world  had  gained  greatly  in  productive  power  during 
the  two  decades  ending  in  1873,  but  the  gain  was  not  suffi- 
cient to  offset  the  combined  operation  of  all  these  causes  of 
waste  and  these  transformations  of  old  conditions.  The 
United  States,  revelling  in  the  fool's  paradise  of  forced  legal 
tender  paper  currency,  was  subjected  to  several  severe  heats 

1  Gilbart,  II. ,  353- 
8  Giffeti,  I.,  113-14. 
8  Wells,  23. 


THE  LATER   CRISES  OF   THE   CENTURY.  655 

and  chills,  while  timid  statesmen  were  waiting  for  the  coun- 
try "to  grow  up"  to  the  volume  of  the  currency.  Great 
Britain  poured  out  her  capital  in  foreign  loans,  as  if  untaught 
by  the  history  of  previous  losses,  and  the  total  securities 
floated  were  calculated  at  ,£505,000,000  in  1872  and  ^624,- 
000,000  in  1873.  The  number  of  joint  stock  companies 
formed  in  Great  Britain  in  1872  was  1116,  with  a  subscribed 
capital  of  ^130,000,000,  and  British  exports  rose  from  ^199,- 
586,000  in  1870  to  ^255,165,000  in  1873.'  Prices  were  in- 
flated on  every  European  bourse,  and  when  the  crash  came 
the  fall  in  securities  on  the  Berlin  market  alone  was  estimated 
at  I3i,i38,ooothalers.  lyoans  taken  in  I/ondon  to  the  amount 
of  ^614,228,300  were  found  wholly  or  partially  in  default  in 
1873  to  the  amount  of  ^332, 399, 800  of  the  principal  involved.2 
Stringency  was  the  chronic  condition  of  the  money  market 
in  the  United  States  during  the  closing  portions  of  1872  and 
the  spring  and  summer  of  1873.  The  final  crash  came  with 
the  failure  of  trust  companies  in  New  York  and  Brooklyn 
early  in  September,  1873.  They  were  followed  on  September 
1 8th  by  the  failure  of  Jay  Cooke  and  Company,  who  were 
agents  of  the  government  and  had  been  leaders  of  the  pow- 
erful syndicate  which  had  handled  the  refunding  of  the 
public  debt.  Credit  was  already  greatly  overstrained,  runs 
took  place  on  the  banks  of  Washington,  Philadelphia,  and 
New  York,  nineteen  banks  and  trust  companies  closed  on 
September  i9th,  and  the  Stock  Exchange  was  closed  for  ten 
days.  Failures  followed  each  other  in  quick  succession, 
mills  and  foundries  stopped,  production  ceased,  and  for  six 
years  the  pall  of  depressed  industry  lay  over  the  United 

J  The  fact  that  loans  are  made  chiefly  in  commodities  rather  than 
in  currency  is  an  important  factor  in  finance  and  has  had  much  to  do 
with  the  development  of  English  trade.  The  exporter  furnishes  the 
commodities,  which  have  for  him  the  character  of  sales  for  cash, 
because  the  bills  which  he  draws  are  purchased  by  lenders  of  capital, 
for  transmission  to  the  borrowing  country  in  payment  for  the  new 
securities.  The  borrowing  country,  being  thus  permitted  to  purchase 
by  the  evidences  of  deferred  payments,  is  able  to  become  a  much 
larger  purchaser  than  would  otherwise  be  the  case. — London  Bankers' 
Magazine,  May,  1892,  UIL,  739. 


656 


HISTORY  OF  MODERN  BANKS  OF  ISSUE. 


States.  Deposits  in  the  national  banks  fell  from  $64 1,121, - 
775  on  June  13,  1873,  to  $540, 5 10,602  on  December  26th. 
The  failures  for  four  years  showed  aggregate  liabilities  of 
$775, 865,000  and  the  railway  bonds  in  default  on  January 
i,  1876,  amounted  to  $789,367,655.' 

The  Secretary  of  the  Treasury  endeavored  to  relieve  the 
money  market  by  paying  out  $24,006,000  in  the  purchase  of 
bonds.  lyittle  of  the  money  reached  the  New  York  banks 
and  they  found  a  more  effectual  expedient  in  the  issue  of 
clearing-house  certificates.2  This  resource  had  been  availed 
of  during  the  forced  liquidations  of  1860  and  other  years  of 
the  war,  but  the  amount  had  never  before  reached  the  fig- 
ures which  were  attained  in  1873.  These  certificates  were 
issued  by  a  committee,  upon  the  deposit  of  approved  securi- 
ties by  the  banks  taking  out  certificates,  and  were  receivable 
in  the  settlement  of  the  balances  of  the  several  banks  at  the 
clearing  house.  This  made  them  the  equivalent  of  currency 
in  the  bank  reserves  and  released  a  corresponding  amount  of 
currency  for  other  uses.  The  issues  of  clearing-house  cer- 
tificates at  New  York,  on  various  occasions  of  stringency 
from  their  adoption  to  1893,  were  as  follows3: 


YEAR. 

FIRST  ISSUE. 

FINAL  CANCELLATION. 

TOTAL   ISSUE. 

MAXIMUM   OUT- 
STANDING. 

i860 

Nov.    23 

Mar.    9,  1861 

$  7,375,ooo 

$    6,86O,OOO 

1861 

Sept.    16 

Apr.  28,  1862 

22,585,000 

21,960,000 

1863 

Sept.    15 

Feb.    i,  1864 

11,471,000 

9,6O8,OOO 

1864 

Feb.     29 

June  13,  1864 

17,728,000 

I6,4l8,000 

i8?3 

Sept.    22 

Jan.  14,  1874 

26,505,000 

22,4X0,000 

1884 

May     15 

June    6,  i8844 

24,915,000 

21,885,000 

1890 

Nov.    12 

Feb.    7,  1891 

16,645,000 

15,205,000 

1893 

June    21 

Nov.   i,  1893 

41,490,000 

38,280,000 

1  Wells,  6. 

2  Kinley,  185-86. 

3  New  York  Journal  of  Commerce,  Jan.  16,  1896.    The  Philadelphia 
clearing  house  issued  16,785,000  iu  1873.    The  banks  paid  six  per  cent, 
interest  on  the  certificates  held,  which  ensured  their  retirement  when 
the  emergency  was  passed. 

4  Except  $250,000  issued  to  the  Metropolitan  National  Bank,  some 
of  which  were  not  paid  until  September  23,  1886. 


THE  LATER   CRISES  OF   THE   CENTURY.          657 

The  crash  in  Vienna  came  earlier  than  that  in  the  United 
States.  The  German  government  became  disquieted  by  the 
fever  of  speculation  in  Prussia  and  the  creation  of  new  joint 
stock  companies,  and  the  paper  of  many  of  these  companies 
was  refused  acceptance  by  the  Bank  of  Prussia.  The  specu- 
lators transferred  their  operations  to  Vienna  and  in  the  first 
quarter  of  1873  $140,000,000,  of  so-called  securities,  but  with 
little  real  security  behind  them,  were  issued  at  the  Austrian 
capital.  The  Bank  of  Austria  was  permitted  to  loan  largely 
on  such  securities,  in  order  to  keep  the  speculators  from 
failure,  but  on  May  2yth,  the  morrow  of  the  opening  of  the 
International  Exposition,  seventy  failures  occurred,  and  on 
the  next  day  no,  involving  establishments  of  the  first  im- 
portance. The  Bourse  was  closed,  the  government  sus- 
pended the  limit  upon  the  note  issues  of  the  bank,  loans 
were  made  by  the  Treasury,  and  a  syndicate  of  bankers  was 
formed  to  make  advances  on  sound  securities.1  A  general 
panic  was  thus  prevented,  but  credit  was  so  far  impaired 
that  it  was  not  until  1875  that  business  in  Austria  resumed 
its  wonted  activity. 

The  forced  liquidations  of  the  Franco-Prussian  War  caused 
severe  pressure  for  a  short  time  upon  the  reserves  of  the 
Bank  of  England  ;  but  the  early  effect  of  the  war,  in  driving 
international  exchanges  to  lyondon  and  Belgium,  and  send- 
ing capital  there  for  safekeeping,  was  to  flood  the  bank  with 
money  and  to  carry  the  discount  rate  downward  from  six 
per  cent,  on  August  4th  until  it  touched  two  and  a  half  per 
cent,  on  September  29th.  The  terms  of  settlement  of  the 
French  indemnity  kept  money  in  Great  Britain  for  a  time, 
and  it  was  eagerly  absorbed  at  low  rates  by  traders  and 
manufacturers.8  The  determination  of  Germany  to  establish 
the  gold  standard,  and  the  heavy  credits  she  had  accumu- 
lated in  London,  began  in  1873  to  draw  gold  away  from 
England,  but  the  raising  of  the  discount  rate  at  the  Bank  of 
England,  until  it  touched  nine  per  cent,  on  September  25, 
1873,  attracted  gold  back  from  the  Continent,  Australia,  and 

1  Juglar,  495. 
8  Gilbart,  II.,  350. 
42 


658          HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

India,  and  1873  and  1874  passed  away  with  comparatively 
little  disturbance. 

The  crisis  in  Great  Britain  was  delayed  until  1875,  when 
several  large  firms  doing  business  in  South  America  went 
down.  In  May  came  the  collapse  of  the  Aberdare  Iron 
Company,  with  liabilities  of  over  ^1,000,000,  which  dragged 
down  two  other  large  concerns  arid  the  brokerage  firm  of 
Sanderson  and  Company,  with  liabilities  of  about  ^7,ooos- 
ooo.  The  banks  maintained  a  firm  front  and  actual  panic 
did  not  occur  until  June  I5th,  when  Alexander  Collie  and 
Company,  Kast  India  merchants,  failed,  with  liabilities  esti- 
mated at  ^3,000,000.  Thirty  firms  followed  them  into  the 
ditch  during  the  following  week  and  it  was  found  that  these 
firms,  as  in  the  case  of  those  connected  with  the  Aberdare 
Iron  Company,  were  simply  tools  of  Collie  and  Company,  in 
floating  their  paper.  The  Bank  of  England  was  well  equip- 
ped with  bullion  and  notes,  and  sound  firms  were  liberally 
assisted,  without  any  advance  in  the  rate  of  discount,  which 
was  only  three  and  a  half  per  cent.  Many  small  firms  went 
to  the  wall,  but  Great  Britain  was  touched  lightly  by  the 
crisis  and  confidence  was  only  briefly  shaken  in  1875.  The 
experience  of  1878,  when  the  City  of  Glasgow  Bank  failed 
with  liabilities  of  ^12,404,297,  was  also  creditable  to  the 
soundness  and  conservatism  of  British  banking.  The  banks 
increased  their  deposits  in  the  Bank  of  England  ^7, 000,000, 
while  they  drew  down  the  cash  reserves  of  the  bank  about 
,£4,000,000.  They  thus  strengthened  themselves  by  actual 
cash  in  hand  or  credits  on  the  Bank  of  England  to  the 
amount  of  /"i  1,000,000.  Several  important  failures  occurred 
during  the  autumn  of  1878,  including  that  of  the  West  of 
England  Bank  at  Bristol,  on  December  9th,  with  liabilities 
of  about  ,£5,  ooo,  ooo,  but  the  crisis  gradually  passed  off  dur- 
ing 1879  without  a  general  run  upon  the  solvent  banks. 


The  Crisis  0/1882-84.. 

The  crisis  in  1882  in  Europe,   which  reacted   upon  the 
United  States  in  1884,  was  most  severe  in  its  economic  ef- 


THE  LATER   CRISES  OF   THE   CENTURY.  659 

fects  in  France,  which  had  escaped  the  effects  of  the  crisis 
of  1873  by  the  forced  liquidation  of  the  Franco- Prussian  War. 
The  severity  of  the  crisis  in  France  was  due  in  a  large  meas- 
ure to  the  education  in  the  employment  of  negotiable  securi- 
ties which  was  afforded  by  the  payment  of  the  great  war 
indemnity.  The  masses  of  the  French  people,  little  accus- 
tomed up  to  that  time  to  any  form  of  saving  but  in  coin  and 
lands,  emptied  their  hoards  in  the  purchase  of  national  se- 
curities, partly  from  a  great  outburst  of  patriotic  feeling,  but 
partly  also  because  they  felt  that  the  guarantee  of  the  gov- 
ernment gave  safety  and  tangibility  to  engraved  pieces  of 
paper,  which  under  other  circumstances  they  would  have 
refused  to  look  upon  as  a  sensible  investment.  The  habit 
of  accepting  such  securities  once  formed,  and  the  advantage 
derived  from  their  regular  returns  once  enjoyed,  it  became 
easier  to  tempt  the  French  peasant  and  workman  to  experi- 
ment with  other  securities  of  a  less  certain  guarantee.1  In- 
vestment societies,  trust  companies,  and  syndicates  sprang 
up  like  mushrooms  in  the  speculative  atmosphere  of  Paris, 
and  those  which  were  upon  too  grand  a  scale  for  any  but 
the  great  financiers  and  the  rich  had  their  imitators  among 
the  adventurers  of  the  street,  who  accepted  gratefully  in  in- 
stalments the  petty  savings  of  the  poor.2  The  loans  of  the 
Credit  Fonder  swelled  from  50,000,000  francs  in  1879  to 
278, 000,000  francs  in  1881,  while  the  Credit  General  Fran$ais, 
the  Union  Generate,  and  the  Banque  de  la  Loire  were  types 
of  great  investment  companies  whose  shares  ran  brief  careers 
of  extravagant  advances  in  price.3 

It  was  not  in  France  alone  that  speculation  assumed  a 
new  development  in  the  eighth  decade  of  the  century.  Specu- 
lation in  earlier  times  had  been  largely  limited  to  the  raw 
materials  and  finished  products  of  commerce,  and  the  burst- 
ing of  the  bubble  had  come  when  high  prices  made  goods 
unmarketable  and  continuances  of  loans  at  the  old  rates 
could  no  longer  be  obtained  at  the  banks.  The  much  more 

1  Leroy-Beaulieu,  II.,  218. 

2  Jannet,  385-86. 

3  Juglar,  435, 


660          HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

complicated  structure  of  modern  commerce,  the  distribution 
of  risks  by  margins  and  futures,  sales  for  report  and  arbi- 
trage, and  the  diffusion  of  savings  and  the  taste  for  invest- 
ment among  all  classes  in  civilized  states,  have  given  a  new 
character  to  speculation  and  made  the  stock  market  a  more 
sensitive  barometer  of  business  conditions  than  the  more 
sluggish  merchandise  markets.  Securities  have  become  the 
most  convenient  means  of  settling  international  balances, 
and  by  their  unrecorded  transfers  have  impaired  the  value 
of  the  statistics  of  visible  commerce.  They  have  become  in 
a  large  measure  a  substitute  for  money  and  have  to  be  con- 
sidered in  dealing  with  monetary  problems.  The  steady  rise 
of  national  securities  in  recent  years  has  been  chiefly  the 
result  of  the  falling  interest  rates  on  capital  and  their  safety 
as  temporary  investments,  but  shrewd  speculators,  by  play- 
ing upon  the  ignorance  of  investors,  have  convinced  them 
that  the  other  securities  upon  the  market  were  sure,  in  their 
hands,  to  pursue  the  same  ascending  course.  Intoxicated 
by  this  prospect  of  paper  riches,  investors  have  measured 
their  expenditures  by  their  assumed  wealth,  have  furnished 
occupations  for  the  ministers  of  luxury,  and  have  brought 
perturbation  into  the  entire  economic  order. l 

Marginal  profits  in  stock  speculations  depend  in  several 
ways  upon  low  rates  for  money,  and  these  disappeared  in 
England  and  France  during  the  autumn  of  1881.  The 
United  States  resumed  specie  payments  on  January  i,  1879, 
and  the  current  of  gold  drawn  towards  the  country  by  the 
operations  of  the  treasury  was  swelled  by  the  abundant  crops 
and  large  exports  of  the  years  which  immediately  followed. 
The  merchandise  exports  from  the  United  States  in  1881  were 

1  "These  effects  of  growing  wealth  have  their  effect  even  upon  the 
public  finances.  Transactions  being  more  numerous  and  being  made 
at  higher  prices,  the  registration  taxes  give  larger  revenues.  It  is 
thus,  that  from  1875  to  1881,  the  receipts  of  the  Treasury  exceeded 
the  official  estimates  by  580,701,788  francs,  and  this  was  made  the  oc- 
casion by  the  party  in  power  for  launching  into  foolish  expenses,  in 
the  famous  plan  of  public  works  of  M.  Freycinet  and  the  purchase  of 
little  railway  lines,  which  resulted  in  a  series  of  loans  in  profound 
peace."  — Jannet,  392. 


THE  LATER   CRISES  OF   THE  CENTURY. 

$902,377,346, — an  amount  never  before  equalled,  and  never 
equalled  afterwards  until  1892.  The  excess  of  exports  over 
imports  of  merchandise  was  $264,661,666  in  1879,  $167,683,- 
912  in  1880,  and  $259,712,718  in  1881.  Europe  was  suffer- 
ing from  a  deficiency  of  crops,  for  which,  in  the  language 
of  Mr.  Wells,  "in  respect  to  duration  and  extent,  there  had 
been  no  parallel  in  four  centuries."  1  The  tide  of  gold,  which 
had  been  outward  for  sixteen  years,  turned  towards  America 
in  1878,  and  the  net  gold  imports  were  $77,119,371  in  1880, 
and  $97,466,127  in  1881.  The  Bank  of  France  found  its  re- 
serve falling  in  the  autumn  of  1881,  and  endeavored  to  avoid 
too  sharp  an  advance  in  the  discount  rate  by  paying  light 
coin  and  charging  a  premium  for  bullion.  The  Bank  of 
England  raised  its  discount  rate  on  October  6th  from  four 
to  five  per  cent.,  and  the  Bank  of  France  followed  with  a 
like  advance  on  October  2oth.  The  crash  came  in  Paris 
and  Lyons  in  January,  1882,  with  the  collapse  of  the  Union 
G£n£rale  and  a  fall  in  all  classes  of  securities.  The  Lyons 
brokers  sought  and  obtained  succor  from  the  Bank  of  France, 
to  the  amount  of  100,000,000  francs,  upon  securities  which 
would  not  ordinarily  have  been  accepted,  and  the  Paris 
agents  of  exchange  obtained  80,000,000  francs,  upon  the 
guarantee  of  a  syndicate  of  bankers.  The  sum  of  ^"924,000 
was  withdrawn  from  the  Bank  of  England  for  France  on 
January  3oth,  and  ^"2, 000,000  was  drawn  out  during  the 
week.  The  Bank  of  England  discount  rate  was  advanced 
on  February  2d  to  six  per  cent.,  and  private  bankers,  con- 
trary to  their  usual  custom,  raised  their  rates  to  that  of  the 
bank.2 

The  counter-stroke  of  the  crisis  in  the  United  States, 
which  was  delayed  until  1884,  was  more  financial  than 
economic,  but  the  multitude  of  failures  caused  intense  alarm 
for  a  time  and  threatened  to  bring  business  to  a  standstill. 
The  Marine  Bank  of  New  York  suspended  on  May  5th, 
closely  followed  by  the  failure  of  the  Metropolitan  Bank,  the 
exposure  of  the  peculiar  methods  of  John  C.  Eno,  Ferdinand 

1  Recent  Economic  Changes,  6. 
*  Juglar,  396. 


662         HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

Ward,  and  George  I.  Seney  and  the  collapse  of  smaller 
houses  connected  with  them.  Money  went  to  one  per  cent, 
a  day,  the  interior  banks  began  to  draw  heavily  upon  their 
New  York  reserves,  and  it  was  hardly  possible  to  obtain 
cash  or  credit  upon  the  best  securities. *  The  decision  of  the 
associated  banks  to  issue  Clearing-House  certificates  calmed 
the  storm  by  degrees,  but  the  failures  of  the  year  were  com- 
puted to  show  liabilities  of  $24o,ooo,ooo,2  and  deposits  in 
the  national  banks  fell  from  $1,060,778,388  on  April  24th  to 
$979,020,349  on  June  20,  1884. 

The  Crisis  of  1890. 

The  crisis  of  1890  afforded  a  striking  illustration  of  the 
better  understanding  of  such  events  which  has  arisen  within 
the  past  half  century,  and  of  the  success  of  skilful  and 
courageous  financiers  in  dealing  with  them.  The  partic- 
ular cause  of  the  crisis  was  the  heavy  loans  through  the 
Barings  to  the  Argentine  Republic,  but  the  years  preceding 
1890  had  been  marked,  as  in  other  such  periods,  by  excessive 
speculation,  the  increase  of  joint  stock  companies  and  the 
inflation  of  prices.  A  part  of  this  tendency  to  speculation 
was  attributed,  as  in  the  case  of  the  crisis  of  1837,  to  tne 
conversion  of  the  public  stocks  or  Consols  in  1888,  under 
the  management  of  Chancellor  Goschen,  from  three  per  cent, 
to  two  and  three-quarters  per  cent.  The  returns  of  the  reg- 
istrar of  joint  stock  companies  showed  the  total  amount  of 
capital  registered  during  1888  to  have  been  ^353,781,594, 
and  in  1889  ,£241,277,468,  while  the  loans  to  the  Argentine 
Republic  alone  in  those  two  years  were  stated  at  ,£36,102,- 
766  in  1888,  and  ^29,223,341  in  1889.*  Railway  earnings 

1  It  is  apropos  of  this  crisis  that  Mr.  Henry  Clews  remarks  that, 
"  Were  the  banks  allowed  to  use  their  reserves  under  .such  circum- 
stances, a  fund  would  be  provided  for  mitigating  the  force  of  the 
crisis,  and  the  danger  might  be  gradually  tided  over  ;  but,  as  it  is, 
the  banks  can  legally  do  little  or  nothing  to  avert  panic  ;  on  the  con- 
trary, the  law  compels  them  to  take  a  course  which  precipitates  it." — 
Twenty-eight  Years  in  Wall  Street,  161. 

*Juglar,477. 

*  Journal  of  the  Institute  of  Bankers,  Jan.,  1891,  XII.,  I. 


THE  LATER  CRISES  OF   THE   CENTURY.          663 

were  increasing,  clearing-house  transactions  were  multiply- 
ing, and  the  securities  of  the  South  American  republics  were 
eagerly  accepted  by  investors  under  the  endorsement  of 
such  a  house  as  the  Barings. 

Money  had  been  poured  into  the  Argentine  Republic  for 
the  development  of  banking,  public  works,  and  retail  trade, 
until  the  natives  might  well  have  been  convinced  that  their 
credit  in  London  was  without  limit.  A  boom  began  in  1886 
which  carried  up  the  price  of  lands,  which  a  few  years  before 
could  be  had  almost  for  the  taking,  to  $50,000  per  league, 
while  suburban  lots  bounded  upward  from  a  few  cents  to 
several  dollars  per  square  metre.  Extravagance  and  luxury 
ruled  among  the  governing  classes,  and  the  banks  which 
were  opened  in  1887  under  the  Guaranteed  Banking  Law 
advanced  money  without  security,  by  the  hundreds  of  thou- 
sands to  men  of  prominence  and  by  the  thousands  to  their 
humbler  followers.  The  requirement  of  payment  by  instal- 
ments disclosed  the  fact  that  the  banks  had  made  many  bad 
debts,  and  it  soon  appeared  that  these  had  been  covered  up 
for  a  time  by  fraudulent  over-issues  of  bank-notes.  The 
legal  circulation,  which  amounted  to  $160,000,000,  or  about 
$40  per  capita,  was  increased  by  the  fraudulent  issue  of 
$50,000,000  to  $60,000,000  in  additional  paper.  The  Na- 
tional Bank,  alone,  exceeded  its  limit  $26,000,000.  Notes 
supposed  to  be  redeemed  were  constantly  reissued,  and  when 
the  crash  came  paper  money  was  so  discredited  that  gold 
went  to  a  premium  of  three  hundred  in  paper,  and  tickets 
for  a  few  cents  were  issued  by  barbers  and  retail  stores 
to  take  the  place  of  the  small  coins  which  disappeared. 1 

The  interest  rate  at  the  Bank  of  England  was  gradually 
lowered  during  1890,  from  six  per  cent,  on  February  2oth,  to 
three  per  cent,  on  April  iyth,  where  it  remained  until  June 
26th.  It  was  then  raised  to  four  per  cent.,  and  afterwards  to 
five  per  cent.,  where  it  stood  on  Thursday,  November  6th. 
Uneasiness  began  to  be  felt  among  well  informed  bankers 
over  the  increase  in  the  acceptances  assumed  by  the  Barings 

1  "  Gaucho  Banking,"  London  Bankers'  Magazine,  Jan.,  1891,  LI., 
37~47- 


664          HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

and  other  houses,  and  the  decline  of  securities  indicated  a 
more  pressing  demand  for  money  and  a  slackening  of  busi- 
ness activity.  The  bank  rate  was  advanced  to  six  per  cent, 
on  Friday,  November  yth,  and  ugly  rumors  were  afloat  in 
Lombard  Street.  The  real  cause  of  the  uneasiness  among 
the  great  financiers  did  not,  however,  become  public  property 
until  a  week  later.  It  was  made  known  on  November  8th,  to 
the  Governor  of  the  Bank  of  England,  Mr.  William  L,id- 
derdale,  fortunately  a  man  of  great  ability  and  decision  of 
character,  that  the  Barings  were  on  the  eve  of  suspending 
payment,  with  liabilities  of  ^21,000,000. 

Mr.  lyidderdale  believed,  in  spite  of  the  unfortunate  his- 
tory of  previous  crises,  that  measures  could  be  adopted  which 
would  prevent  a  crash.  He  accordingly  perfected  arrange- 
ments within  the  following  week,  by  which  the  Bank  of 
England  was  able  to  announce  on  November  i4th  that  all  the 
liabilities  of  Baring  Brothers  and  Company  would  be  pro- 
vided for  by  the  bank,  and  that  any  loss  to  the  bank  would  be 
made  good  by  a  circle  of  guarantors  embracing  the  greatest 
institutions  of  Great  Britain.  The  joint  stock  banks  of 
London,  the  leading  banks  of  the  provinces,  and  the  joint 
stock  banks  of  Scotland  entered  into  a  combination  aggre- 
gating £  15, 000,000,  "to  make  good  to  the  Bank  of  Eng- 
land any  loss  which  may  appear  whenever  the  Bank  of 
England  shall  determine  that  the  final  liquidation  of  the 
liabilities  of  Messrs.  Baring  Brothers  and  Company  has  been 
completed,  so  far  as  in  the  opinion  of  the  governors  is  prac- 
ticable." This  guarantee  was  to  continue  for  three  years, 
and  afforded  absolute  assurance  to  the  business  ccmmunity 
that  no  great  losses  to  individuals  and  respectable  houses 
would  occur.  The  Chancellor  of  the  Exchequer  was  in 
constant  consultation  with  Mr.  L,idderdale  while  the  ne- 
gotiations for  the  guarantee  were  going  on  and  offered  him 
the  benefit  of  the  suspension  of  the  Bank  Act  of  1844,  so  as 
to  permit  the  issue  of  additional  notes,  if  he  thought  it  desi- 
rable, but  Mr.  Lidderdale  declined  to  foster  alarm  by  admit- 
ting the  necessity  for  the  classic  remedy  of  the  great  crises 
of  1847,  l857>  and  1866. 


THE  LATER   CRISES  OF   THE   CENTURY.  66$ 

Mr.  Lidderdale  preferred  to  keep  within  the  law,  and  at 
the  same  time  to  equip  the  bank  with  the  means  of  meeting 
heavy  demands  for  notes,  by  borrowing  gold  from  France, 
Russia,  and  other  sources.  The  sum  of  £3,000,000  in  gold 
was  brought  over  under  a  special  contract  with  the  Bank  of 
France,1  ,£1,500,000  was  obtained  from  St.  Petersburgh,  and 
,£500,000  was  drawn  from  other  sources.  All  this  sum  of 
£"5,000,000  thus  became  available  as  the  guarantee  of  addi- 
tional note  issues  if  the  pressure  for  money  should  become 
serious.  Mr.  Lidderdale  would  not  even  alarm  the  commu- 
nity by  forcing  up  the  rate  of  interest  to  an  extreme  point, 
but  maintained  it  at  six  per  cent,  and  insisted  that  the  great 
joint  stock  banks  should  continue  discounting,  as  usual.2 
These  measures  were  so  successful  that  the  period  of  stress 
was  passed  without  actual  panic  and  liquidation  set  in  with- 
out important  failures.  The  note  issues  of  the  Bank  of 
England  increased  from  .£34, 507, 580  on  November  i2th  to 
,£39,939,900  on  November  26th,  but  the  increase  was  almost 
exclusively  in  the  notes  held  in  the  banking  department  and 
there  was  no  unusual  pressure  for  currency. 

The  firm  of  Baring  Brothers  and  Company  was  reorganized 
as  a  limited  company  with  a  capital  of  ,£1,000,000,  and  made 
arrangements  to  continue  business.  The  affairs  of  the  Ar- 
gentine Republic  were  found  in  an  extremely  bad  shape  and 
have  not  yet  been  entirely  adjusted,  but  the  surplus  resources 
of  the  Barings  enabled  a  gradual  reduction  of  their  liabilities 
outstanding  at  the  time  of  the  failure.  The  adjustment 
proceeded  so  rapidly  that  Mr.  David  Powell,  the  Governor 
of  the  Bank  of  England,  was  able,  at  a  general  court  held  on 
March  16,  1893,  to  make  the  following  report  : 3 

The  liabilities,  which  have  been  increased  during  the  past  six 
months  by  a  claim  from  the  executors  of  the  late  T.  C.  Baring,  now 


1  This  loan  was  secured  by  the  deposit  of  Exchequer  bonds  issued  to 
the  Bank  of  England  by  the  British  Government,  in  exchange  for 
national  debt  stock.    The  cost  of  the  transaction  was  ^100,000,  be- 
sides interest. — Pol.  Science  Quat'ly,  March,  1894,  IX.,  23. 

2  MacLeod,  Theory  of  Credit,  II.,  836. 

3  I^ondon  Bankers'  Magazine,  April,  1893,  I/V.,  610. 


666         HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

stand  at  ,£"4,558,813,  while  the  value  of  the  assets  under  the  new  es- 
timate stands  at  ^4,908,935,  giving  an  apparent  surplus  of  ^350,122. 
It  will  be  seen  that  progress,  though  not  so  rapid  as  in  the  previous 
six  months,  has  been  made  in  the  liquidation,  the  debt  to  the  bank 
having  been  reduced  in  the  past  six  months  by  ^"625,000.  It  may  be 
well,  however,  to  remind  you  how  much  has  been  effected  since  the 
guarantee  was  set  on  foot.  The  liabilities,  which  in  the  aggregate 
reached  a  total  of  ^30,313,000,  have  been  reduced,  in  a  period  of  about 
two  years  and  a  quarter,  to  ^"4,558,813  ;  nearly  the  whole  of  the 
"bills  receivable,"  "remittances  to  come  forward,"  etc.,  amounting 
to  ^21,193,664,  have  been  get  in  without  loss,  and  securities  have 
been  realized  to  the  value  of  ^"4,560,523.  It  will  be  remembered  that 
the  period  of  three  years,  for  which  the  guarantees  were  originally 
given,  will  expire  in  November  next,  and,  looking  to  the  question 
how  far  the  liquidation  could  be  carried  out  without  material  loss  be- 
fore that  date,  it  was  felt  desirable,  in  the  interests  of  the  guarantors, 
that  the  time  should  be  extended  ;  and  I  am  happy  to  be  able  to  say, 
that  practically  the  whole  body  of  guarantors  have  consented  to  con- 
tinue their  guarantee  for  one-fourth  of  the  original  amount — which  is 
all  that  is  required— for  one  year  certain  from  November  next,  and 
for  a  further  period  of  one  year  if  deemed  expedient  in  the  inter- 
ests of  the  guarantors.1 

The  intimate  connection  between  the  world's  markets  is 
indicated  by  the  fact  that  the  withdrawal  of  British  deposits 
in  Australia  caused  a  stringency  which  foreshadowed  the 
crisis  of  1893,  an(^  tnat  tne  Imperial  Bank  of  Germany  for- 
bore for  a  time  making  drafts  upon  London.2  The  strin- 
gency which  occurred  in  the  United  States,  however,  in  the 
autumn  of  1890  came  before  the  Baring  crisis  and  was  less 
intimately  related  to  that  event  than  to  the  accumulation  of 
surplus  revenues  in  the  Treasury.  This  had  been  so  serious 
a  danger  for  several  years  that  Secretary  Fairchild  in  1888 
deposited  a  large  part  of  the  surplus  in  national  banks,  while 
he  extended  the  policy,  which  lie  had  already  inaugurated, 
of  purchasing  unmatured  bonds  at  a  premium.  The  pur- 
chase of  bonds  was  continued  by  Secretary  Windom,  and 
was  pursued  on  a  large  scale  during  the  summer  and  autumn 

1  The  guarantors  were  relieved  of  further  liability  towards  the  close 
of  1894,  and  the  further  settlements  were  undertaken  by  a  private 
company. 

8Jannet,  113. 


THE  LATER   CRISES  OF   THE   CENTURY.  66? 

of  1890.  "The  amount  of  public  money  set  free  within 
seventy-five  days  by  these  several  disbursements,"  Secretary 
Windom  declared,  referring  to  circulars  issued  up  to  Septem- 
ber 6th,  "  was  nearly  $76,660,000,  and  the  net  gain  to  circu- 
lation was  not  less  than  forty-five  millions  of  dollars,  yet 
the  financial  conditions  made  further  prompt  disbursements 
imperatively  necessary."  1  Another  offer  to  purchase  these 
bonds  was  issued  011  September  13,  1890,  and  the  total  dis- 
bursements between  June  3Oth  and  the  close  of  September 
were  $98,276,682,  of  which  $75,828,200  was  on  the  principal 
of  bonds  redeemed  and  the  remainder  for  interest  and  premi- 
ums. The  resources  of  the  Treasury  were  practically  ex- 
hausted and  no  assistance  could  be  given  to  the  money 
market  when  the  reflex  action  of  the  Baring  crisis  was  felt 
two  months  later  in  the  United  States.  A  number  of  im- 
portant failures  occurred,  but  the  more  disastrous  results  of 
the  exhaustion  of  the  Treasury  were  reserved  fry  1893. 

1  Finance  Report,  1890,  xxix. 


CHAPTER  XXIV. 
THE  CRISIS  OF  1893. 

The  Reverberation  of  the  Baring  Crash  over  Europe,  America,  and 
Australia — Distrust  of  American  Silver  Legislation — The  Failure 
of  the  Brussels  Conference,  the  Suspension  of  Free  Coinage  in 
India,  and  the  Coming  of  the  Panic — The  Shrinkage  of  Values 
— Repeal  of  the  Sherman  Law  and  the  Bond  Contract  of  1895 
— Land  Speculation  and  Bad  Banking  in  Australia. 

THE  financial  crisis  of  1893  was  in  a  large  measure  an 
afterclap  of  the  Baring  failure  in  1890.  Many  mil- 
lions of  British  money  had  been  invested  in  American 
and  Australian  securities  and  the  discredit  which  fell  upon 
Argentine  and  other  South  American  investments  with  the 
failure  of  the  Barings  resulted  in  an  irresistible  movement 
to  unload  such  securities  and  transfer  European  capital  to 
home  investments.  Such  a  tendency  would  in  itself  have 
seriously  crippled  the  great  enterprises  carried  on  in  the 
United  States,  South  America,  and  Australia  on  foreign  capi- 
tal, even  if  those  countries  had  not  been  in  any  way  at  fault. 
Results  proved  that,  while  credit  rested  upon  no  such  rotten 
basis  in  the  United  States  and  Australia  as  in  Argentina, 
there  had  been  much  sinking  of  circulating  capital  in  unpro- 
ductive enterprises  and  a  tendency  towards  unwise  economic 
policies  which  had  fettered  the  industries  of  those  countries 
and  driven  gold  from  its  legitimate  place  in  their  monetary 
circulation.  Circumstances  which  might  have  impaired 
American  and  Australian  credit  under  any  conditions  were 
emphasized  by  the  general  distrust  aroused  by  the  Baring 
failure  and  it  required  only  the  rude  test  of  the  withdrawal 
of  foreign  support  to  confirm  the  suspicions  of  foreign  inves- 

668 


THE   CRISIS  OF  ifyj.  669 

tors  and  bring  to  a  head  the  real  evils  of  the  economic 
situation. 

The  first  shock  was  felt  in  Australia,  whose  people  had 
been  congratulating  themselves  upon  their  rapidly  accumulat- 
ing wealth  and  their  swelling  bank  credits,  based  in  reality 
upon  inflated  valuations  of  real  estate  and  of  agricultural 
products.  The  shock  was  soon  communicated  to  the  United 
States  and  its  reverberations  affected  the  stock  markets  of 
Berlin  and  Vienna,  checked  the  efforts  of  Austria-Hungary 
to  establish  the  gold  standard,  and  drove  Austrian  securities 
homeward  from  Germany  as  the  result  of  the  scramble  for 
ready  cash  in  the  Berlin  market.  Italy  was  affected  by  the 
prevailing  distrust,  and  the  evils  generated  by  corruption 
among  her  bankers  and  public  men  were  intensified  by  the 
return  of  Italian  securities  and  the  steady  outflow  of  gold 
and  even  of  subsidiary  silver  coins  under  the  pressure  of  a 
depreciated  paper  currency.  The  Credit  Mobilier  Italien, 
with  a  capital  of  75,000,000  lires  ($14,500,000),  was  forced 
to  suspend  by  the  difficulty  of  calling  up  advances,  with  de- 
posits of  50,425,000  lires  and  advances  of  89,109,000  lires.1 
France  saw  her  importations  shrink  from  4, 767, 867,000  francs 
($920,000,000)  in  1891  to  3,936,720,000  francs  ($760,000,000) 
in  1893.  Even  Turkey  suffered  from  the  fall  in  the  prices 
of  the  products  of  agriculture,  which  constitute  the  larger 
part  of  her  exportations.  Opium  within  the  space  of  a  few 
years  fell  twenty-four  per  cent.,  wool  fifteen  percent.,  and 
raisins  eight  per  cent.2 

The  crisis  in  the  United  States  attracted  the  most  atten- 
tion, because  of  the  magnitude  of  their  commercial  interests 
and  of  the  investments  of  foreign  capital  in  their  railways, 
breweries,  cattle  ranges  and  public  securities.  Foreign  in- 
vestments in  the  United  States  would  have  required  large 
payments  to  Europe  prior  to  1893  if  American  enterprises 
had  not  proved  up  to  that  time  so  attractive  that  the  interest 
upon  them  was  constantly  reinvested.  The  result,  accord- 
ing to  the  acute  observation  of  M.  Arthur  Raffalovich,  was 

1  Revue  des  Banques,  Jan.,  1894,  XIII.,  15. 

2  Revue  des  Banques,  Aug.,  1894,  XIII.,  166. 


670          HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

that ' '  the  true  indebtedness  of  the  United  States  abroad  had 
been  completely  hidden  by  the  influx  of  foreign  capital. 
What  the  nation  had  to  pay  in  interest  on  railway  and 
municipal  obligations  and  industrial  investments  had  never 
been  felt  as  a  charge  upon  commerce,  in  consequence  of  the 
compensation  which  resulted  from  the  uninterrupted  entry 
of  capital  placed  by  Europe."  l  The  withdrawal  of  this 
capital, — even  the  mere  suspension  of  the  process  of  rein- 
vesting it,— meant  heavy  payments  in  gold  or  merchandise 
to  Europe,  without  compensation  in  returning  gold  or  goods. 
The  annual  payments  required  to  Europe,  outside  those  com- 
pensated by  American  exports,  were  estimated  by  Mr.  Heidle- 
bach,  a  New  York  banker,  at  $350,000,000,  and  the  principal 
of  the  debt  upon  which  interest  was  due  was  computed  at  not 
less  than  two  billions  of  dollars.2  The  withdrawal  of  a  large 
portion  of  this  productive  loan  was  the  price  which  the  United 
States  were  called  upon  to  pay  for  political  manoeuvres  which 
aroused  the  fear  that  they  would  abandon  the  gold  standard 
and  make  silver  the  basis  of  their  monetary  system.8 


1  Le  Marche  Financier  en  1893-1894,  255. 

2  These  figures  were  largely  mere  estimates  until  a  careful  compu- 
tation was  made  in  the  Journal  of  Commerce  and  Commercial  Bulle- 
tin, July  8,   1895,  based  upon  inquiries  among  brokers,  steamship 
agents,  and  others  possessing  actual  knowledge.     This  investigation 
made  the  total  annual  indebtedness  to  Europe,  exclusive  of  merchan- 
dise movements  in  either  direction,  $i 75, 475,000  and  the  credits  on 
the  other  side  $29,750,000,  leaving  a  net  indebtedness  by  the  United 
States  of  $145,725,000.    The  leading  debtor  item  was  $90,000,000  on 
investment  account,  which  would  represent  a  capital  of  at  least  $2,- 
500,000,000.     The  creditor  items  included  $14,000,000  brought  by  im- 
migrants, $14,850,000  for  outlays  of  foreign  vessels  in  American  ports, 
and  $1,900,000  for  outward  earnings  of  American  vessels.     These  fig- 
ures take  no  account  of  the  portion  of  the  annual  debt  which  may  be 
settled  by  new  securities. 

3  This  tendency  to  the  withdrawal  of  foreign  capital  was  observed  to 
some  extent  after  the  passage  of  the  Bland  bill  and  the  Senate  reso- 
lution offered  by  Senator  Matthews  of  Ohio,  that  the  obligations  of 
the  United  States  were  legally  payable  in  silver.     Vide  London  Econo- 
mist, September  28,  1878;  Leroy-Beaulieu,  II. ,  229.     The  tendency 
only  became  marked,  however,  after  the  passage  of  the  law  of  1890. 


THE   CRISIS  OF 


67I 


A  combination  of  influences  worked  together  to  induce  an 
unhealthy  condition  of  industry  and  finance  and  to  bring 
about  the  collapse  of  1893.  The  passage  of  the  Sherman 
silver  law  of  1890  was  not  the  absolutely  unique  cause  of 
the  crash  of  three  years  later,  but  it  contributed  powerfully 
to  that  result,  indirectly  as  well  as  directly.  The  withdrawal 
of  gold  from  the  United  States  Treasury  pursued  an  almost 
uninterrupted  course  from  the  moment  of  the  enactment  of 
the  Sherman  silver  law  until  the  outbreak  of  the  panic.  The 
following  table,  brought  down  for  convenience  to  a  more  re- 
cent date,  will  show  the  progress  of  this  depletion  of  the 
gold  reserve : 


DATE. 

TOTAL  GOLD   IN 
TREASURY. 

GOLD   CERTIFICATES 
IN  CIRCULATION. 

NET  GOLD  RESERVE. 

February  28,  1889 

$326,456,697 

$130,210,717 

$196,245,980 

June  30,  1889 

303,504,319 

116,792,759 

l86,7II,56O 

December  31,  1889 

3I3,8l8,94I 

122,985,889 

190,833,052 

June  30,  1890 

321,612,424 

131,380,019 

190,232,405 

December  31,  1890 

293,O2O,2I4 

144,047,279 

148,972,935 

June  30,  1891 

2:8,518,122 

120,850,399 

117,667,723 

December  31,  1891 

278,846,750 

148,106,119 

130,740,631 

June  30,  1892 

255,577,705 

141,235,339 

114,342,367 

December  31,  1892 

23S,359,801 

117,093,139 

121,266,663 

June  30,  1893 

188,455,432 

92,97O,OI9 

95,485,413 

December  31,  1893 

158,303,779 

77,412,179 

80,89I,6OO 

June  30,  1894 

131,217,434 

66,344,409 

64,873,025 

December  31,  1894 

139,606,354 

53,361,909 

86,244,445 

June  30,  1895 

155,893,931 

4J,3Sl,569 

107,512,362 

December'  31,  1895         113,198,707 

49,936,439 

49,845,507 

March  16,  1896 

171,356,965 

43,426,829 

127,930,136 

Gold  exports  began  in  large  volume  the  month  the  Sher- 
man law  was  approved  and  reached  a  total  in  the  fiscal  year 
1891  of  $86,362,654  ;  in  1892  of  $50,195,327  ;  and  in  1893 
of  $108,680,844.  There  were  imports  during  the  months  in 
which  the  American  crops  were  marketed,  but  the  three 
years  contributed  an  excess  of  exports  of  $68,130,087  in 
1891,  $495>873  iu  l892>  and  $87, 506,463  in  1893.  The  theory 
of  Gresham's  law,  that  the  departure  of  gold  denotes  the 
presence  of  a  poorer  currency  behind  the  gold,  expelling  it 
from  the  country,  was  verified  by  the  manner  in  which  the 


6/2          HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

gold  went  out  as  the  new  Treasury  notes  were  pumped  into 
the  circulation  at  the  rate  of  $4,500,000  per  month.  The 
Treasury  notes  issued  undes  the  Sherman  law  up  to  June  30, 
1893,  were  $147,190,227;  the  net  gold  exports  from  the 
United  States  from  June  30,  1890,  to  June  30,  1893,  were 
$156,132,423;  and  the  reduction  of  the  aggregate  gold  in 
the  Treasury  during  the  same  period  was  $133,156,991. 
Other  causes  than  the  mere  addition  of  the  notes  to  the  cir- 
culating medium  doubtless  contributed  to  the  expulsion  of 
gold,  but  the  coincidence  of  these  three  items, — the  loss  of 
gold  by  the  Treasury,  its  export  from  the  United  States,  and 
the  issues  of  notes, — is  at  least  striking. 

From  the  moment  that  the  Sherman  law  was  enacted,  the 
Treasury  of  the  United  States  was  under  the  necessity  of 
constant  expedients  to  keep  its  gold  and  replenish  it  when  it 
was  lost.  The  government  availed  itself  of  every  opportu- 
nity to  obtain  gold  in  exchanges  when  there  was  a  demand 
for  small  notes  by  offering  greater  conveniences  to  those  who 
tendered  gold  in  exchange  for  paper  than  to  those  who  ten- 
dered other  forms  of  currency.  Appeals  to  the  generosity 
and  patriotism  of  the  national  banks,  which  still  held  a  con- 
siderable reserve  of  gold,  were  frequently  made  during  the 
autumn  of  1892  and  the  early  months  of  1893.  New  appeals 
of  this  sort  were  made  under  the  administration  of  President 
Cleveland  and  the  gold  reserve  was  increased  from  $90,722,- 
958  on  June  10,  1893,  to  $97,286,677  on  July  loth,  by  the 
efforts  of  a  banking  combination  in  New  York,  and  by  lead- 
ing bankers  of  Boston,  Baltimore,  Chicago,  and  Philadel- 
phia. 

These  devices  were  unavailing  to  permanently  arrest  the 
combined  effects  of  the  infusion  of  paper  into  the  currency 
and  the  period  of  speculation  and  large  imports  of  foreign 
merchandise  which  had  set  in.  Funds  were  raised  for  work- 
ing alleged  tin-mines  in  South  Dakota ;  vast  tracts  of  land 
were  purchased  in  Florida  to  be  unloaded  as  sugar  lands 
upon  foreign  investors  under  the  guarantee  of  the  govern- 
ment bounty  upon  sugar  ;  and  new  towns  sprang  up  all  over 
the  South,  dowered  in  the  imagination  of  their  projectors 


TtfE   CRISIS  OF  1893.  673 

with  infinite  possibilities  of  mineral  wealth  and  manufactur- 
ing development,  but  which  proved  in  fact  little  more  than 
bottomless  pits  for  the  millions  of  northern  capital  spent  in 
laying  them  out.  It  was  the  same  with  suburban  improve- 
ments in  the  neighborhood  of  the  great  cities  as  with  the 
' '  boom ' '  towns  of  the  South.  Millions  were  sunk  in  improve- 
ments, in  advance  of  actual  demand,  upon  property  for 
which  no  purchasers  could  be  found  when  people  began  to 
ask  themselves  what  was  the  basis  of  reality  beneath  inflated 
and  fictitious  values.  Railroad  building  was  not  so  marked 
a  feature  of  the  years  preceding  the  panic  of  1893  as  of  earlier 
panics,  but  there  was  a  great  demand  for  capital  for  equipping 
street  railways  with  new  power  and  the  railways,  as  usual, 
were  among  the  first  to  feel  the  effects  of  slakening  industry.1 
The  conviction  that  the  country  was  upon  the  high  road  of 
prosperity  led  to  extravagant  expenditure  by  individuals, 
corporations,  municipalities,  and  the  Federal  government. 
Foreign  goods  poured  into  the  country  at  an  accelerating 
velocity  until  the  volume  of  imports  rose  from  $745,131,652 
in  1889  to  $866,400,922  in  1893.  The  scarcity  of  the  crops 
in  Europe  in  1891  caused  a  great  demand  upon  the  United 
States  to  supply  the  deficiency,  and  American  exports  of 
$1,015,732,011  in  the  fiscal  year  ending  June  30,  1892,  offset 
in  a  measure  the  stream  of  imports,  arrested  the  loss  of  gold, 
and  delayed  the  crisis  which  might  otherwise  have  sooner 
followed  the  operation  of  the  Sherman  law. 

The  relief  which  the  farmers  were  thus  enabled  to  bring 
to  the  fiscal  situation  of  the  country  was  but  temporary. 
Europe  was  just  recovering  from  a  crisis  and  a  part  of  the 


1  A  list  of  dividends  paid  in  1893  which  had  ceased  to  be  paid  in 
1895  showed  a  total  of  $61,710,000  per  year.  Capitalizing  this  at  five 
per  cent,  and  making  an  addition  for  smaller  concerns  not  included  in 
the  list,  "  the  bad  investments  of  the  public,  within  three  years,  came 
fully  up  to  $1,500,000,000  and  are  likely  to  exceed  it." — "Matthew 
Marshall "  in  New  York  Sun,  July  i,  1895.  This  list  included  no 
losses  on  real  estate  investments  and  none  in  industrial  enterprises, 
except  a  few  of  the  largest,  whose  shares  were  the  subject  of  trading 
on  the  New  York  Stock  Exchange. 

43 


674         HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

payment  for  the  crops  of  1891  was  made  by  the  return  of 
American  securities  instead  of  the  shipment  of  gold.  Amer- 
ican exports  of  merchandise  fell  in  the  fiscal  year  1893  to 
$831,030,785  and  the  balance  of  trade  against  the  United 
States  for  the  six  months  ending  June  30,  1893,  was  $68,800,- 
021.  The  national  banks  of  the  East,  warned  by  the  Euro- 
pean crisis,  began  to  scan  their  loans  and  strengthen  their 
gold  holdings.1  The  failures  reported  by  Bradstreet's  Com- 
mercial Agency  in  April,  1893,  were  905,  as  compared  with 
703  in  the  same  month  of  1892,  and  the  number  increased 
to  969  in  May  as  compared  with  680  in  May  of  the  year 
before.  The  panic  did  not  become  acute,  however,  until  the 
middle  of  May.  The  Chemical  National  Bank  of  Chicago, 
with  a  capital  of  $1,000,000,  closed  its  doors  on  May  9th, 
and  was  followed  two  days  later  by  the  Columbia  National 
Bank  of  Chicago,  with  a  capital  of  an  equal  sum.  These 
suspensions,  accompanied  by  the  collapse  of  private  and 
State  banks  and  business  firms  and  corporations,  paralyzed 
credit  and  brought  the  country  to  the  verge  of  a  crisis. 

Upon  these  conditions  of  unstable  equilibrium  came  the 
shock  of  the  suspension  of  silver  coinage  in  British  India. 
There,  as  in  other  silver  using  countries,  the  fall  in  the  gold 
price  of  silver  had  brought  changes  in  values  and  difficulties 
of  administration  and  exchange.  The  United  States  had 
been  making  efforts  for  seventeen  years  to  avert  the  effects 
of  the  depreciation  of  silver  by  means  of  an  international 
bimetallic  union.  Congress  by  a  joint  resolution  of  August 
15,  1876,  appointed  a  joint  committee  of  eight  members, 
known  as  the  "Silver  Commission,"  which  submitted  an 
elaborate  report  on  March  2,  1877.  The  majority  of  this 
commission  reported  in  favor  of  ' '  the  restoration  of  the 


1  Their  gold  holdings  increased  $22,000,000  during  the  year  ending 
September  30,  1892,  which,  says  Comptroller  Hepburn,  "  coupled  with 
the  known  fact  that  many  State  banks  and  trust  companies  have  also 
fortified  themselves  with  a  gold  reserve  during  the  year,  shows  that  the 
fear  that  we  were  drifting  towards  a  silver  basis  was  not  confined  to 
foreigners."  This  is  dated  December  5,  1892,  six  month*  before  the 


THE   CRISIS  OF  1893.  675 

double  standard  and  the  unrestricted  coinage  of  both  met- 
als. ' ' l  The  other  three  members  did  not  favor  free  coinage 
by  the  United  States  without  the  concurrence  of  other 
nations.  The  United  States  took  the  initiative  in  proposing 
an  international  conference,  which  met  in  Paris  on  August 
10,  1878,  and  the  American  delegates  proposed  an  interna- 
tional agreement  for  the  equal  coinage  of  both  metals.  The 
majority  of  the  delegates  of  the  European  states  presented 
resolutions  declaring  "that  the  question  of  the  restriction 
of  the  coinage  of  silver  should  equally  be  left  to  the  discre- 
tion of  each  state  or  group  of  states,"  and  that  the  differ- 
ences of  opinion  which  had  developed  ' '  exclude  the  discussion 
of  the  adoption  of  a  common  ratio  between  the  two  metals."  a 
The  American  delegates— Mr.  R.  E.  Fenton,  Mr.  W.  S. 
Groesbeck,  General  Francis  A.  Walker,  and  their  secretary, 
Mr.  S.  Dana  Horton, — filed  a  protest  against  this  decision. 
A  second  attempt  to  secure  a  bimetallic  union  was  made 
in  the  summer  of  1881  by  the  concurrent  invitations  of  the 
American  and  French  governments.  Senator  Magnin,  the 
French  Minister  of  Finance,  presided  at  the  opening  of  the 
conference  and  indicated  a  part  of  the  reasons  for  its  meet- 
ing by  stating  that  the  resolutions  adopted  by  the  majority 
of  the  European  delegates  in  1878  were  adopted  when  the 
Dutch  delegates  were  not  present,  the  Italian  delegates  refused 
to  be  parties  and  the  approval  by  other  delegates  was  given 
only  under  reservations.  The  American  and  French  dele- 
gates, through  Mr.  Evarts,  lately  Secretary  of  State  of  the 
United  States,  again  urged  the  formation  of  a  bimetallic 
agreement,  and  the  delegates  of  the  European  states  voted 
"that  there  is  ground  for  believing  that  an  understanding 
may  be  established  between  the  states  which  have  taken 
part  in  the  conference  ;  but  that  it  is  expedient  to  suspend 
its  meetings. ' '  Upon  their  proposition ,  therefore,  an  adj  ourn- 


1  Reports  of  the  Silver  Commission  of  1876,  Sen.  Rep.  703,  44th 
Cong.,  2d.  Sess.,  126. 

f  International  Monetary  Conferrence  held  in  Paris,  in  August,  1878, 
Sen.  Ex.  Doc.  58,  45th  Cong.,  3d  Sess.,  163. 


676         HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

ment  was  taken  until  April  12,  1882,  but  the  conference  was 
never  reassembled.1 

The  last  attempt  to  secure  a  bimetallic  agreement  was 
made  at  the  suggestion  of  the  United  States  in  1892,  but  the 
invitations  were  limited  to  the  purpose  of  securing  a  larger 
use  for  silver.  The  British  government  was  unwilling  to 
enter  a  conference  with  the  declared  purpose  of  restoring  the 
free  coinage  of  both  gold  and  silver  and  the  form  of  the  in- 
vitations was  adapted  by  the  United  States  to  their  position, 
in  order  to  secure  their  participation  in  the  conference.  The 
delegates  of  the  United  States  were  Senator  Allison  of  Iowa, 
Senator  Jones  of  Nevada,  Representative  McCreary  of  Ken- 
tucky, Mr.  Henry  W.  Cannon  of  New  York,  formerly  Comp- 
troller of  the  Currency,  and  Professor  K.  Benjamin  Andrews, 
President  of  Brown  University  of  Providence,  Rhode  Island. 
Mr.  Terrell,  the  United  States  Minister  at  Brussels,  also  took 
part  in  the  conference  and  Mr.  Kdward  O.  Leech,  the  Di- 
rector of  the  Mint,  was  an  advisory  delegate.  Several 
propositions  for  the  purchase  and  coinage  of  silver  on  gov- 
ernment account  in  limited  quantities  were  submitted  to  the 
conference,  but  it  was  again  found  that  an  agreement  could 
not  be  reached  and  an  adjournment  was  taken  on  December 
17,  1892,  until  May  30,  1893.  The  German  delegates  were 
unwilling  to  bind  their  government  to  the  policy  of  a  second 
meeting,3  and  the  events  of  the  winter  were  so  little  favor- 
able to  bimetallism  that  President  Cleveland  did  not  feel 
justified  in  seeking  a  reassembling  of  the  conference. 

These  several  efforts  to  restore  bimetallic  coinage  hardly 
arrested  for  a  moment  the  downward  course  of  silver,  and 
the  government  of  British  India  felt  that  they  could  no 
longer  await  the  distant  possibilities  of  international  action. 
The  fall  in  the  price  of  silver  caused  constantly  increasing 
difficulties,  because  of  the  heavy  interest  charges  payable  in 
London  and  the  diminishing  value  of  the  proceeds  of  taxa- 


1  Proceedings  of  the  International  Monetary  Conference  held  in 
Paris  in  1881  ;  Washington,  1887  ;  506. 

2  International  Monetary  Conference,  held  at  Brussels  under  the 
Act  of  August  5,  1892.— Sen.  Ex.  Doc.  82,  370. 


THE   CRISIS  OF  1893.  677 

tion  when  measured  in  gold.  It  was  not  merely  a  difficulty 
which  weighed  upon  the  local  administration,  but  it  affected 
every  British  officer  in  India  who  received  his  pay  in  silver 
rupees,  originally  worth  about  forty-eight  cents,  but  which 
had  been  steadily  declining  in  gold  value.  A  remittance  by 
bills  of  exchange  on  London  to  family  or  creditors  at  home 
meant  a  shrinkage  of  nearly  fifty  per  cent,  in  the  nominal 
value  of  the  money  received  in  India.  These  troubles  led  to 
the  appointment  of  a  special  committee  of  able  financiers  by 
the  Secretary  of  State  for  India  on  October  21,  1892,  who 
submitted  their  report  on  May  31,  1893. 

Rumors  of  the  character  of  the  report  of  the  Indian  Cur- 
rency Committee  began  to  circulate  in  London  early  in  June, 
but  their  proposals  still  lacked  the  sanction  of  executive 
action.  It  was  not  until  June  26,  1893,  that  it  was  officially 
announced  that  the  Legislative  Council  of  India  had  ordered, 
with  the  approval  of  the  home  government,  the  closing  of  the 
mints  to  the  free  coinage  of  silver  on  account  of  individuals. 
It  was  proposed  at  the  same  time  to  fix  the  exchange  value  of 
the  rupee  at  one  shilling,  four  pence,  or  the  equivalent  of  about 
thirty-two  cents  in  United  States  money.  Such  a  policy  had 
been  recommended  by  the  Committee  and  was  supported  by 
the  experience  of  Holland  and  Austria-Hungary,  which  had 
been  able  by  suspending  the  free  coinage  of  silver  to  float  a 
large  mass  of  silver  and  paper  currency  far  above  the  bullion 
value  of  the  silver  and  not  far  below  parity  in  gold.1  The 
net  imports  of  silver  into  India  for  the  nineteen  English 
official  years  ending  March  31,  1893,  were  $704,040,907,  or 
an  annual  average  of  $37,054,784,  which  had  been  much 
exceeded  during  the  last  eight  years  of  the  period.  The 
market  for  nearly  one-third  of  the  annual  production  of  the 
silver  mines  of  the  world  was  thus  closed  by  the  stroke  of  a 
pen  in  Downing  Street. 

The  news  of  the  action  of  the  British  government  caused 
a  profound  sensation  in  the  United  States  and  increased  the 
tendency  to  unreasoning  panic.  Secretary  Carlisle  had  al- 


Report  of  Indian  Currency  Committee,  Sec.  93-98. 


678          HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

ready,  on  June  22d,  authorized  the  anticipation  of  the  July 
interest  on  the  four  per  cent,  bonds  and  the  Pacific  Railroad 
six  per  cent,  bonds,  with  a  view  to  bringing  the  slender 
resources  of  the  Treasury  to  the  relief  of  the  growing  string- 
ency in  the  money  market.  The  Treasury  was  practically 
exhausted  by  the  enormous  purchases  of  bonds  at  a  pre- 
mium in  the  autumn  of  1890  and  by  the  abolition  of  the  duty 
on  sugar  by  the  tariff  act  of  that  year,  and  the  gold  reserve 
was  already  below  $100,000,000.  The  price  of  silver,  which 
was  36  pence  per  ounce  in  London  and  78  cents  in  New 
York  on  June  26th,  tumbled  to  30^/2  pence  in  London  and 
65  to  67  cents  in  New  York  on  June  3oth.  The  value  of  the 
bullion  holdings  of  the  government  shrivelled  by  this  change 
in  four  days  by  about  $37,000,000,  and  it  was  evident  that 
the  United  States  could  no  longer  afford  to  carry  alone  the 
burden  of  sustaining  the  price  of  silver. 

President  Cleveland  made  an  earnest  effort  to  secure  the 
repeal  of  the  Sherman  law  during  the  short  session  of  the 
Fifty-second  Congress,  before  taking  office,  as  he  had  done 
in  1885  to  secure  the  repeal  of  the  Bland  Silver  Act,  then 
in  force.  The  House  Committee  on  Coinage  in  the  Fifty- 
second  Congress  had  been  constituted  by  Speaker  Crisp  with 
a  majority  in  favor  of  free  coinage  and  of  continuing  in  force 
existing  laws  requiring  Treasury  purchases  of  silver.  It 
was  necessary,  therefore,  in  order  to  bring  before  the  House 
any  measure  repealing  the  Sherman  law,  to  have  it  reported 
from  another  committee.  Representative  Andrew  of  Boston 
was  one  of  the  first  to  discover  a  way  of  doing  this.  He 
introduced,  on  December  12,  1892,  a  bill  amending  the  na- 
tional banking  law,  but  containing  a  provision  repealing  the 
silver  purchasing  clause  of  the  Act  of  1890.  This  bill  was 
referred  under  the  rules  to  the  Committee  on  Banking  and 
came  before  the  House  on  February  gth,  by  means  of  a 
special  order  reported  by  the  Committee  on  Rules  for  its 
consideration.  The  order  was  not  satisfactory  in  form  to 
the  advocates  of  repealing  the  Act  of  1890,  and  its  adoption, 
by  a  vote  of  152  to  143,  constituted  their  virtual  defeat.  The 
affirmative  vote  was  given  by  108  Democrats,  35  Republi- 


THE   CRISIS  OF  1893.  679 

cans,  and  9  Populists  and  the  negative  vote  by  105  Democrats 
and  38  Republicans.  Several  conferences  were  held  with  a 
view  to  a  further  effort  to  secure  repeal  or  to  secure  a  reduc- 
tion of  silver  purchases,  but  no  plan  was  framed  which  was 
acceptable  to  the  Eastern  Republicans,  whose  votes  were 
necessary  to  make  a  majority  for  repeal.  President  Cleve- 
land caused  it  to  be  understood,  soon  after  his  inauguration, 
that  he  would  not  summon  Congress  in  extra  session  before 
September  unless  a  serious  crisis  confronted  the  country. 
The  crisis  was  invoked  in  the  latter  days  of  June,  1893,  by 
the  closing  of  the  Indian  mints  and  the  effect  upon  the 
American  currency.  A  meeting  of  the  cabinet  was  held  on 
June  30th,  at  which  the  increasing  number  of  suspensions 
by  the  banks  and  the  paralysis  of  business  were  fully  dis- 
cussed, and  it  was  decided  to  issue  a  proclamation  summon- 
ing Congress  in  extra  session  at  noon  on  the  yth  day  of 
August. 

The  summons  came  none  too  soon  and  did  little  to  stay  the 
progress  of  the  panic.  Banking  institutions,  national,  State, 
and  private,  were  daily  suspending,  depositors  were  with- 
drawing their  cash  from  the  banks,  and  industrial  enter- 
prises were  coming  to  a  halt.  Twenty-five  national  banks 
suspended  in  June, — a  number  never  before  exceeded  in  an 
entire  year, — seventy-eight  suspended  in  July,  and  thirty- 
eight  in  August.1  The  collapse  of  private  and  State  banks 
was  even  more  alarming.  An  average  of  about  seventy  sus- 
pensions per  year  up  to  the  close  of  1892  swelled  to  415  dur- 
ing the  first  eight  months  of  1893,  representing  liabilities  of 
$97>I93>53°-  Banks  all  over  the  country  began  to  refuse  to 
pay  checks  except  in  certified  or  clearing-house  checks,  cur- 
rency went  to  a  premium,  and  many  factories  were  obliged 
to  shut  down  for  lack  of  money  to  pay  their  employees. 
The  refusal  to  cash  checks  in  currency  and  the  premium 
offered  for  it  by  New  York  brokers  arrested  deposits  in  the 


1  Eighty-four  of  the  banks  afterwards  resumed  business.  The  capi- 
tal of  sixty-seven  national  banks  actually  insolvent  during  the  year 
ending  October  31,  1893,  was  $11,035,000. 


680          HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

banks,  but  brought  much  that  was  in  private  hoards  into  the 
market.1 

Some  conception  of  the  reduction  in  exchanges  caused  by 
the  panic  may  be  gathered  from  the  shrinkage  of  the  tran- 
sactions of  the  New  York  Clearing  House  from  $34,421,380,- 
870  for  the  year  ending  October  i,  1893,  to  $24,230,145,368 
for  the  year  ending  October  i,  1894.  The  comparison  for 
the  prosperous  month  of  October,  1892,  with  the  same  month 
of  1893,  showed  a  shrinkage  in  the  clearing  transactions  of 
the  leading  cities  of  the  United  States  from  $5,501,901,592 
to  $4,043,510,662.  The  clearings  throughout  the  leading 
cities  of  the  country  showed  a  shrinkage  from  $58,880,682,- 
455  for  the  year  ending  September  30,  1893,  which  included 
a  part  of  the  period  of  panic,  to  $45,017,960,736  for  the  year 
ending  September  30,  1894.  The  failures  throughout  the 
country  increased  from  10,270,  with  liabilities  of  $108,500,- 
ooo,  in  1892,  to  15,560,  with  liabilities  of  $402,400,000,  in 
1894. 

The  shrinkage  in  money  values  was  as  marked  as  in  the 
volume  of  exchanges.  Securities  which  had  been  considered 
the  safest  ceased  to  pay  dividends  and  fell  rapidly  in  value 
in  the  hands  of  the  holders.  The  Erie,  the  Philadelphia  and 
Reading,  the  Atchison,  Topeka  and  Santa  Fe,  and  the  Union 
Pacific  were  among  the  great  railway  systems,  representing 
hundreds  of  millions  of  obligations,  which  passed  into  the 
hands  of  receivers.  Railway  earnings  fell  $147,390,077  dur- 
ing the  year  ending  June  30,  1894,  as  compared  with  the 
previous  year,  or  12.07  Per  cent.  of  the  gross  earnings. 
Hundreds  of  millions  of  invested  capital  thus  ceased  to  be 
productive,  and  those  who  had  fancied  themselves  in  the 


1  The  surprising  thing  about  this  suspension  of  cash  payments  by 
some  of  the  banks  was  that  little  public  complaint  was  made  about  it. 
The  business  public  seemed  to  recognize  it  as  a  necessary  condition 
of  the  panic,  although  it  is  doubtful  if  it  was  necessary.  Some  of  the 
banks  continued  to  meet  all  demands  for  currency  and  nearly  all  paid 
small  checks.  It  was  estimated  that  $15,000,000  in  currency  was  sold 
in  New  York  during  the  crisis.— Alex.  D.  Noyes,  Political  Science 
Quarterly,  IX.,  29. 


THE   CRISIS  OF  ifyj.  68 1 

possession  of  an  assured  income  from  their  stock  holdings 
found  their  wealth  turned  to  ashes  in  their  hands.  A  crash 
in  industrial  stocks  took  place  on  May  5,  1893,  but  July  26th 
was  one  of  the  panic  days  on  the  stock  exchanges.  Rates 
for  money  in  New  York,  which  were  normal  in  the  morning, 
rose  to  75  per  cent,  per  annum  before  the  close  of  business. 
The  scarcity  of  money  forced  holders  of  securities  to  unload. 
Atchison  general  fours  dropped  from  71  to  66 ;  New  York, 
Lake  Erie,  and  Western  seconds  fell  from  59  to  53  ;  Chicago 
gas  went  down  from  50  to  43^  ;  and  General  Electric 
slumped  from  47^  to  40^2.  The  excitement  in  New  York 
was  so  intense  that  it  was  proposed  to  close  the  Stock  Ex- 
change, but  the  proposition  was  rejected  by  the  governors 
at  their  meeting  the  next  day.  An  appeal  was  made  to  the 
foreign  exchange  houses  for  help  and  $10,000,000  in  gold 
was  engaged  in  L,ondon  while  exchange  was  quoted  above 
the  exporting  point. 

The  heavy  demands  upon  the  national  banks  and  the  re- 
duction of  their  coin  and  currency  threatened  early  in  the 
panic  to  carry  their  cash  reserves  below  the  limit  required 
by  law  in  the  reserve  cities.  The  reserves  of  the  New  York 
banks  were  close  to  the  limit  early  in  July  and  fell  on 
August  5,  $14,017,800  below  it.  The  natural  remedy  for 
the  scarcity  of  currency  was  the  successful  expedient  of 
other  years  of  panic, — the  issue  of  clearing-house  certifi- 
cates. The  first  issues  was  made  in  Philadelphia  on  June 
1 6th,  but  the  New  York  banks  promptly  followed  on  June 
2ist,  and  those  of  Boston  and  Baltimore  six  days  later. 
The  largest  amount  outstanding  at  one  time  in  New  York 
was  $38,280,000,  from  August  29th  to  September  6th;  in 
Philadelphia,  $10,965,000,  on  August  i5th ;  in  Boston, 
$11,445,000,  from  August  23d  to  September  ist ;  and  in 
Baltimore,  $1,475,000  from  August  24th  to  September  gth. 
These  issues,  amounting  with  $987,000  at  Pittsburg,  to 
$63,152,000,  are  the  only  ones  reported  by  the  Comptroller 
of  the  Currency,  but  they  only  served  as  a  lesson  to  the 
clearing  houses  of  the  country.  Some  form  of  certificate  of 
this  character  was  issued  in  nearly  every  considerable  city 


682          HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

and  served  to  greatly  relieve  the  strain  upon  the  ordinary 
circulation. 

A  more  striking  indication  of  the  readiness  of  American 
bankers  and  business  men  to  respond  to  the  necessities  of 
the  moment  was  the  issue  of  emergency  paper  for  general 
circulation.  The  clearing-house  certificates  were  employed 
only  between  the  banks.  The  law  imposing  a  ten  per  cent, 
tax  upon  the  notes  of  State  and  private  banks  was  supposed 
to  stand  across  the  path  of  any  issues  for  general  circulation, 
but  the  law  received  little  attention  when  the  absolute 
necessity  of  a  circulating  medium  forced  itself  upon  the 
country.  Certificates  and  certified  checks  were  issued  in 
scores  of  communities  where  currency  could  not  be  had. 
They  were  usually  guaranteed  by  the  associated  banks 
where  there  were  such  banks  ;  they  were  issued  by  a  single 
bank  in  even  amounts  where  concerted  action  could  not  be 
obtained  ;  and  they  were  issued  by  railway  companies  and 
manufacturers  where  arrangements  could  not  be  made  with 
the  banks.  In  a  few  cases  they  were  issued  with  the  guar- 
antee of  the  local  authorities  drawn  upon  some  public  fund. 
These  certificates  and  checks  proved  very  useful  where  cur- 
rency was  in  demand  for  pay-rolls,  were  treated  as  cash  by 
banks  and  merchants,  and  were  promptly  redeemed  when 
the  panic  was  over.  1 

The  financial  crisis  of  1893  was  a  striking  illustration  of 
the  truth  that  bank-note  circulation  plays  but  a  trifling  part, 
or  none,  in  promoting  crises.  The  national  banks  had  been 

1  Representative  John  DeWitt  Warner  of  New  York,  commenting 
upon  the  relations  of  these  issues  to  the  ten  per  cent,  tax  law,  de- 
clared that  "  In  this  way,  after  the  machinery  so  carefully  adjusted  by 
government  had  utterly  failed  to  work,  the  business  common  sense 
of  our  people  readjusted  its  finances  ;  and  in  every  part  of  the  land 
business  started  up  again,  manufacture  continued,  the  laborer  received 
his  hire,  and  the  merchant  disposed  of  his  goods." — Sound  Currency, 
Vol.  II.,  No.  6,  p.  8-  These  emergency  issues  were  so  entirely  winked 
at  by  the  government  that  the  collections  under  the  ten  per  cent,  tax 
on  bank  circulation  were  returned  by  the  Commissioner  of  Internal 
Revenue  for  the  year  ending  June  30,  1894,  as  only  two  dollars  and 
twenty-six  cents. 


THE   CRISIS  OF  1893.  683 

contracting  their  secured  circulation  until  it  stood  on  June  i, 
1893,  at  only  $177,164,255.  They  had  shared  in  the  expan- 
sion of  business,  however,  by  the  increase  in  their  numbers 
and  in  their  deposits.  The  number  of  national  banks  formed 
in  1890  was  307,  with  an  aggregate  capital  of  $36,250,000. 
The  year  1891  showed  organizations  of  193  new  banks,  with 
capital  of  $20,700,000  ;  1892  showed  organizations  of  163 
banks,  with  capital  of  $15,285,000;  and  1893  na(i  already 
shown  119  new  organizations,  with  capital  of  $11,230,000, 
before  the  process  of  expansion  was  arrested,  with  the  bank- 
ing year  only  two-thirds  complete.  Even  more  remarkable 
was  the  extension  of  banking  on  deposits  instead  of  on  the 
capital  and  surplus  of  the  banks.  Bank  capital  increased 
seventy  per  cent,  from  1870  to  1892,  and  the  number  of 
banks  more  than  doubled,  but  individual  deposits  were 
multiplied  three  and  one  half  times  and  rose  from  one-third 
of  total  liabilities  in  1870  to  more  than  one-half  in  1892. 

One  of  the  defects  of  the  operation  of  the  national  banking 
law,  revealed  anew  by  the  crisis,  was  the  use  made  of  the  pro- 
visions permitting  the  deposit  in  reserve  cities  of  three- fifths 
of  the  cash  reserve  of  the  country  banks  and  permitting  the 
reserve  banks  to  pay  interest  on  such  deposits.  The  national 
banks  of  the  country  on  May  4,  1893,  showed  $174,312,- 
119  as  due  from  reserve  agents,  $121,673,794  due  from 
national  banks,  and  $32,681,708  due  from  State  banks. 
Many  banks  throughout  the  West  were  obliged  to  suspend, 
because  their  reserves  were  not  within  ready  reach.  Out 
of  a  total  of  one  hundred  and  fifty-eight  national  banks 
which  were  forced  to  suspend  payments  during  the  year 
ending  October  31,  1893,  eighty-six  were  authorized  to  re- 
sume business  within  a  short  time,  and  not  one  of  these  was 
east  of  the  Ohio  or  north  of  the  Potomac.  This  is  the  best 
proof  that  these  Western  and  Southern  banks  would  have 
been  able  to  maintain  their  solvency  if  their  cash  reserve 
had  been  in  their  own  custody.  '  It  was  also  a  subject  of 


1  This  argument  is  intelligently  worked  out  by  Mr.  Alexander  D. 
Noyes,   "The  Banks  and  the  Panic  of  1893,-"  iu  Political  Science 


684         HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

criticism  that  the  banks  were  forbidden  to  make  new  loans 
when  their  cash  reserves  fell  below  the  fixed  legal  limits. 
The  Comptroller  was  authorized  to  require  a  bank  to  make 
good  its  reserve,  and  failing  this  to  appoint  a  receiver.  This 
power  was  used  with  moderation  by  Comptroller  Eckels  and 
the  banks  of  the  reserve  cities  increased  their  liquid  resources 
by  their  issues  of  clearing-house  certificates. ' 

The  meeting  of  Congress  on  August  yth  found  the  Eastern 
members  of  both  political  parties  so  strongly  impressed  with 
the  serious  condition  of  the  country  that  they  were  prepared 
to  push  the  repeal  of  the  silver  purchase  law  by  the  most 
drastic  measures  and  by  a  union  of  forces  without  regard  to 
political  divisions.  The  message  of  President  Cleveland, 
transmitted  to  Congress  on  the  day  following  their  meeting, 
recommended,  ' '  the  prompt  repeal  of  the  provisions  of  the 
Act  passed  July  14,  1890,  authorizing  the  purchase  of  silver 
bullion,  and  that  other  legislative  action  may  put  beyond  all 
doubt  or  mistake  the  intention  and  the  ability  of  the  govern- 
ment to  fulfil  its  pecuniary  obligations  in  money  universally 
recognized  by  all  civilized  countries. ' '  An  agreement  was 
reached  on  August  loth,  between  the  supporters  and  oppo- 
nents of  the  President,  that  debate  should  begin  the  next  day 
and  that  the  vote  on  a  repealing  bill  should  be  taken  on 
August  28th.  Mr.  Wilson  of  West  Virginia,  the  recognized 
leader  of  the  Democratic  majority  of  the  House,  introduced 
a  repealing  bill  early  the  next  morning.  The  silver  men, 
in  accordance  with  their  pledges  to  their  opponents,  made 
no  attempt  to  interpose  dilatory  tactics  and  the  roll  was 
called  on  the  passage  of  the  bill  on  the  28th  of  August. 

The  votes  given  upon  this  day  showed  the  largest  ma- 
jority against  the  silver  standard  given  for  many  years  in 
the  House  of  Representatives.  The  first  vote  was  taken 
upon  a  motion  of  Representative  Bland  of  Missouri,  for  the 
opening  of  the  mints  of  the  United  States  to  the  free  coinage 

Quarterly,  IX.,  12.     It  is  not  to  be  inferred  that  deposits  in  reserve 
cities  should  be  cut  off  entirely,  but  simply  that  they  should  be  con- 
fined within  more  prudent  limits. 
1  Report  on  the  Finances,  1893,  356. 


THE   CRISIS  OF  1893.  68$ 

of  silver  at  the  ratio  of  sixteen  to  one.  The  vote  was  125  in 
the  affirmative  and  226  in  the  negative,  — a  majority  of  101 
against  the  proposition.  The  intense  interest  taken  in  the 
issue  and  the  demand  from  the  country  that  every  member 
should  be  accounted  for  is  indicated  by  the  size  of  the  vote, 
which  included  every  living  member  of  the  House  except 
two, — a  sick  member  from  New  York  who  was  paired  in 
favor  of  repeal  with  a  South  Carolina  silver  member.  The 
next  vote  was  taken  upon  free  coinage  at  the  ratio  of  seven- 
teen to  one,  which  was  rejected,  101  to  241.  Free  coinage 
at  the  ratio  of  eighteen  to  one  was  rejected,  103  to  240  ;  free 
coinage  at  the  ratio  of  nineteen  to  one  was  rejected,  104  to 
238  ;  free  coinage  at  the  ratio  of  twenty  to  one  was  rejected, 
122  to  222.  The  next  motion  of  Mr.  Eland's  was  to  revive 
the  Act  of  February  28,  1878,  requiring  the  monthly  pur- 
chase of  not  less  than  $2,000,000  worth  of  silver  bullion  and 
its  coinage  into  standard  silver  dollars.  The  silver  men 
rallied  their  greatest  strength  upon  this  proposition,  which 
they  represented  as  a  compromise,  but  Mr.  Eland's  motion 
was  rejected,  136  to  213.  The  roll  was  then  called  upon  the 
repealing  bill  of  Mr.  Wilson  and  it  was  passed,  239  to  109, — 
a  clear  majority  of  130  votes.  The  affirmative  vote  was  cast 
by  138  Democrats  and  101  Republicans  ;  the  negative  vote 
was  cast  by  73  Democrats,  25  Republicans,  and  1 1  Populists 
and  Independents. 

The  indications  of  favorable  action  in  the  Senate,  where 
the  supporters  of  silver  were  strongest,  were  greatly  strength- 
ened when  the  Committee  on  Finance  voted,  on  August  i8th, 
to  report  a  repealing  bill,  similar  in  its  effects  to  the  bill 
which  was  before  the  House,  but  containing  some  declara- 
tory matter  in  favor  of  maintaining  the  parity  of  gold  and 
silver.  A  careful  canvass,  during  the  progress  of  the  debate, 
revealed  the  conversion  to  the  repeal  side  of  enough  admin- 
istration Democrats  and  moderate  Republicans  to  make  a 
majority  of  eleven  for  repeal.  The  existence  of  this  ma- 
jority seemed  for  a  time,  however,  to  be  of  little  avail 
against  the  cumbersome  rules  of  the  Senate.  The  silver 
Senators,  by  persistent  dilatory  tactics,  brought  the  Senate 


686          HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

at  least  twice  close  to  the  verge  of  surrender  to  their  wishes. 
The  last  and  most  serious  occasion  was  after  the  failure  of 
the  attempt  to  tire  out  the  silver  leaders  by  a  night  session. 
The  Senate  went  into  continuous  session  on  the  evening  of 
October  nth,  but  the  Populist  Senator,  Allen  of  Nebraska, 
held  the  floor  continuously  for  fifteen  hours,  and  the  attempt 
to  maintain  a  quorum  of  repeal  members  broke  down  at  half- 
past  one  o'clock  on  the  morning  of  October  i3th.  Senator 
Gorman  of  Maryland,  who  had  never  expressed  any  confi- 
dence of  getting  a  vote  on  repeal,  was  one  of  the  promoters 
of  the  compromise  then  proposed,  and  every  Democratic 
Senator  but  four  signed  an  agreement  to  support  it.  The 
President  refused  to  countenance  compromise  in  a  statement 
given  out  on  Sunday  night,  October  22d,  and  the  renewed 
firmness  of  the  friends  of  repeal  forced  the  silver  men  three 
days  later  to  lay  down  their  arms  and  admit  that  they  could 
not  postpone  indefinitely  a  vote  on  the  bill.  The  repeal  bill 
passed  the  Senate  on  October  3oth,  by  a  vote  of  43  to  32,  with 
five  pairs  ;  two  days  later,  on  November  ist,  the  Senate 
amendments  to  the  form  of  the  bill  were  concurred  in  by  the 
House,  and  the  bill  was  approved  by  the  President.1 

The  acute  stage  of  the  crisis  was  over  before  the  approval 
of  the  silver  repeal  bill  by  the  President,  but  the  expected 
revival  of  activity  did  not  follow  on  the  heels  of  repeal. 
Confidence  in  American  credit  abroad  had  been  too  severely 
shaken  and  the  unfavorable  conditions  created  by  the  Sher- 
man law  were  still  felt  with  too  much  force  for  business  to 
resume  at  once  its  wonted  activity.  The  history  of  former 
financial  crises  was  repeated  in  the  accumulation  of  idle 
capital  in  the  banks  in  the  form  of  deposits,  the  swelling  of 
the  cash  reserves,  and  the  reduction  of  commercial  loans. 


1  The  writer  by  a  rather  curious  coincidence,  predicted  in  the 
Journal  of  Commerce  and  Commercial  Bulletin  on  July  6th,  and  in  the 
Springfield  Republican  on  July  10,  1893,  the  exact  date  on  which  the 
repeal  bill  would  become  law.  "The  Sherman  law  cannot  be  re- 
pealed before  November  ist,"  was  the  language  used  in  the  Repub- 
lican^ and  the  course  of  events  under  the  rules  of  the  two  houses 
of  Congress  was  outlined  almost  exactly  as  they  afterwards  occurred. 


THE   CRISIS  OF  1893. 


687 


The  following  table  shows  the  state  of  the  loans,  the  specie 
reserve,  and  the  individual  deposits  of  the  national  banks  at 
various  dates  before  the  crisis  and  during  the  period  of  de- 
pression which  followed,  according  to  the  reports  to  the 
Comptroller  of  the  Currency  : 


DATE. 

LOANS  AND  DIS- 
COUNTS. 

SPECIE  RESERVE. 

INDIVIDUAL 
DEPOSITS. 

May  4,  1893 

$2,l6l,40I,85S 

$207,222,141 

$1,749,930,817 

July  12,  1893 

2,O2O,483,67I 

l86,76l,I73 

,556,761,230 

October  3,  1893 

1,843,634,167 

224,7O3,86O 

,451,124,330 

December  19,  1893 

1,871,574,769 

251,253,648 

,539,399,795 

February  28,  1894 

I,872,4O2,6O5 

256,166,585 

,586,800,444 

May  4,  1894 

1,926,686,824 

259,941,923 

,670,958,769 

July  18,  1894 

1,944,441,315 

250,670,652 

,677,801,200 

October  2,  1894 

2,OO7,I22,I9I 

237,250,654 

,728,418,819 

December  19,  1894 

1,991,913.123 

2l8,O4I,222 

,695,489,346 

March  5,  1895 

1,965,375,368 

220,931,641 

,667,843,286 

May  7,  1895 

1,989,411,201 

218,646,599 

,690,961,299 

July  n,  1895 

2,016,639,535 

214,427,194 

,736,022,006 

September  28,  1895 

2,059,408,402 

196,237,311 

,701,653,521 

These  figures  show  the  gradual  reduction  and  slow  re- 
covery of  the  loans  and  discounts,  which  afford  the  best 
measure  of  business  activity.  The  individual  deposits 
suffered  at  first,  but  began  to  recover,  as  timid  capital  was 
withdrawn  from  active  investment.  The  accumulations  of 
idle  capital  were  largest  in  New  York  and  other  cities  of  the 
East,  because  less  capital  had  been  destroyed  there  by  bad 
investments  and  less  was  needed  to  support  consumption 
which  was  no  longer  supplied  by  current  earnings.  The 
partial  restoration  of  confidence  in  the  banks,  unaccompanied 
by  sufficient  general  confidence  to  promote  new  business 
enterprises,  transformed  the  scarcity  of  currency  which  pre- 
vailed at  the  acute  state  of  the  panic  into  plethora,  which 
there  was  no  means  of  relieving  except  by  the  export  of 
gold.  Gold  for  export  had  been  furnished  up  to  1892  by 
the  banks  of  New  York  city,  and  the  banks  and  the  govern- 
ment mutually  paid  gold  and  gold  certificates  in  the  settle- 
ment of  their  balances  at  the  New  York  Clearing  House. 
The  settlement  of  these  balances  in  gold  was  practically  sus- 


688          HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

pended  by  the  Treasury  in  the  summer  of  1892.  The  banks 
were  obliged  to  withhold  gold  from  their  customers  for  the 
payment  of  custom  duties  and  to  send  them  to  the  Treasury 
for  gold  for  export. 

The  combined  effects  of  the  loss  of  gold  income,  the 
reduction  of  receipts,  the  plethora  of  government  paper 
currency,  and  the  continued  withdrawal  of  foreign  capital 
was  to  compel  four  issues  of  bonds,  aggregating  $262, 315,- 
400  in  principal  and  $293, 000,000  in  net  proceeds  to  the 
Treasury,  during  1894,  1895,  an<^  1896.  The  most  potent 
cause  of  these  losses  was  the  withdrawal  of  foreign  capital, 
but  this  withdrawal  was  itself  stimulated  by  the  accumula- 
tion of  idle  currency,  and  the  distrust  of  the  financial  policy 
of  the  United  States  which  was  invoked  by  the  reduction 
of  the  gold  reserve.  The  operation  of  the  legal  tender 
currency  and  of  the  Act  of  1878,  forbidding  its  cancellation 
when  redeemed,  was  to  expose  the  Treasury  to  persistent 
raids  for  gold,  against  which  it  had  no  means  of  protection 
through  the  interest  rate,  the  charging  of  a  premium,  or  the 
control  of  the  foreign  exchanges.  The  very  gold  paid  into 
the  Treasury  for  bonds  sold  to  replenish  the  reserve,  was 
obtained  in  large  measure  by  the  presentation  of  legal  tender 
notes  at  the  New  York  sub-Treasury  for  redemption. 

The  bids  for  the  first  issue  of  $50,000,000  in  five  per  cent, 
ten  year  bonds  were  opened  on  February  i,  1894,  and  the 
reserve  was  raised  on  February  28th,  to  $106,527,068.  Gold 
exports  from  the  United  States  set  in  heavily  again  in  April, 
1894,  and  were  not  arrested  until  the  beginning  of  the  out- 
ward movement  of  the  crops  in  August.  The  net  exports 
of  gold  from  the  United  States,  after  deducting  imports, 
were  $9,402,110  in  April,  $23,124,058  in  May,  $22,376,872 
in  June,  $12,823,572  in  July,  and $1,935,303  in  August,  1894, 
when  the  tide  turned  slightly  in  the  other  direction.  The 
respite  was  but  a  short  one  and  bids  for  another  block  of 
$50,000,000  in  five  per  cent,  ten  year  bonds  were  opened 
November  24,  I894.1  The  reserve  was  restored  from  $58,- 

1  The  net  proceeds  of  the  first  loan  were  158,660,917,  and  of  the 
second  $58,538,500.—  Finance  Report,  1894, 


THE   CRISIS  OF  1 893.  689 

1/  on  September  29th,  to  $106,821,428  on  December 
loth  ;  but  the  demand  for  the  redemption  of  notes  in  gold 
during  the  next  two  months  surpassed  all  previous  experience 
and  carried  the  reserve  down  to  $44,705,967  on  January  31, 
1895.  The  redemptions  of  November  were  $7,799,747  and 
those  of  December  $31,907,221.  There  was  a  slackening 
of  the  pressure  during  the  early  days  of  January,  but  it  set 
in  again  with  renewed  violence  during  the  last  ten  days  of 
the  month  and  drove  the  Treasury  to  the  verge  of  the  sus- 
pension of  gold  payments.  The  single  day  of  January  25, 
1895,  showed  redemptions  of  $7,156,046,  and  the  evening  of 
Saturday,  February  2d,  arrived  with  only  $9,700,000  in  gold 
coin  available  in  the  New  York  sub-Treasury.  Even  this 
was  obtained  by  trenching  upon  the  fund  held  for  the  re- 
demption of  gold  certificates.  Panic  was  seizing  the  busi- 
ness community  and  a  single  New  York  bank  reported  to 
Assistant  Secretary  Curtis  that  on  January  3oth  they  received 
over  one  hundred  and  fifty  requests  for  gold  coin,  most  of  it 
evidently  for  hoarding.1 

President  Cleveland  recommended  the  retirement  of  the 
legal  tender  notes  and  the  substitution  of  a  banking  currency 
in  his  annual  message  to  Congress  in  December,  but  the 
House  of  Representatives  on  January  9,  1895,  refused  to 
consider  the  bill  reported  in  pursuance  of  this  recommenda- 
tion. The  President  on  January  28th  sent  a  special  message 
to  Congress,  asking  that  he  be  given  authority  to  retire  the 
greenbacks  and  to  issue  bonds  under  more  favorable  condi- 
tions than  those  authorized  by  existing  law.  A  bill  to  carry 
out  his  recommendations  was  introduced  by  Chairman 

1  Distrust  of  the  security  of  United  States  notes  or  the  pressure  of 
the  excessive  paper  currency  produced  a  very  different  attitude  on  the 
part  of  the  public  towards  the  gold  reserve  after  the  passage  of  the 
Sherman  law  from  that  which  prevailed  before.  The  paper  money 
presented  to  the  Treasury  for  redemption  in  gold  was  $7,976,698  during 
the  fiscal  year  1879,  the  first  six  months  after  resumption,  and  declined 
in  1882  as  low  as  $40,000.  The  largest  redemptions  between  1879  and 
1891  were  $6,863,699  in  1886.  The  redemptions  in  1891  were  $5,986,- 
070  ;  in  1892,  $9,125,842  ;  in  1893,  $102,100,345  ;  in  1894,  $84,802,150 ; 
in  1895,  $117,354,178;  and  in  1896,  $158,655,956. 
44 


690          HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

Springer  of  the  Banking  Committee  and  reported  by  him  to 
the  House  two  days  later.  The  bill  authorized  the  issue  of 
three  per  cent,  bonds,  redeemable  after  ten  days  at  the 
pleasure  of  the  government ;  the  cancellation  of  the  green- 
backs received  in  payment  for  the  bonds,  to  the  amount  of 
new  circulation  issued ;  and  the  increase  of  national  bank 
circulation  to  the  par  value  of  bonds  deposited  as  security. 
This  bill  was  defeated,  on  January  yth,  by  a  vote  of  135  to 
162. 

The  eighth  day  of  February,  1895,  was  marked  by  the 
delivery  to  Congress  of  a  special  message  from  President 
Cleveland,  describing  one  of  the  most  notable  transactions 
of  modern  finance.  The  President  announced  the  comple- 
tion of  a  contract  for  the  purchase  by  the  government  of 
3,500,000  ounces  of  standard  gold  coin,  by  the  delivery  of 
about  $62,400,000  in  four  per  cent,  coin  bonds,  redeemable 
after  thirty  years.1  The  purchasers  of  the  bonds  were 
Messrs.  August  Belmont  and  Co. ,  on  behalf  of  themselves, 
and  Messrs.  N.  M.  Rothschild  and  Sons,  of  L,ondon,  and 
Messrs.  J.  P.  Morgan  and  Co.,  on  behalf  of  themselves  and 
Messrs.  J.  S.  Morgan  and  Co.  of  London.  The  contract  was 
witnessed  by  Assistant  Secretary  William  E.  Curtis,  who 
had  much  to  do  with  bringing  it  to  a  successful  completion, 
and  by  Mr.  Francis  Lynde  Stetson  of  New  York.  There 
was  an  alternative  clause,  reserving  to  the  Secretary  of  the 
Treasury  the  right,  in  case  he  should  receive  authority  from 
Congress  within  ten  days,  to  substitute  three  per  cent,  bonds 
specifically  payable  in  gold  coin  for  the  coin  bonds  author- 
ized by  existing  law.  The  effect  of  this  substitution,  if  the 
gold  bonds  were  accepted  at  par,  as  the  contract  provided, 
would  have  been,  according  to  the  message  of  the  President, 
to  save  the  United  States  in  interest  charges  $539,159  per 
year,  or  $16, 174,770  during  the  thirty  years  fixed  as  the  term 
of  the  bonds.  A  bill  to  authorize  this  substitution  of  gold 
bonds  was  reported  by  Chairman  Wilson  of  the  Ways  and 

1  The  actual  transactions  under  the  contract  were  the  delivery  of 
$65,116,244  in  gold  for  $62,315,400  in  bonds. — Finance  Report ',  1895, 
LVI. 


THE   CRISIS  OF  1893.  691 

Means  Committee  of  the  House  on  February  13,  1895,  Dut 
was  defeated  in  the  House  the  next  day  by  a  vote  of  120  to 
167,  and  the  contract  was  left  in  force  according  to  its 
original  terms. 

The  peculiar  feature  of  this  contract  for  the  exchange  of 
bonds  for  gold  lay  in  the  provision  that  the  purchasers  of  the 
bonds,  "  as  far  as  lies  in  their  power,  will  exert  all  financial 
influence  and  will  make  all  legitimate  efforts  to  protect  the 
Treasury  of  the  United  States  against  the  withdrawal  of 
gold  pending  the  complete  performance  of  this  contract. " 
The  fulfilment  of  this  pledge  was  accomplished  through  the 
control  over  the  foreign  exchanges  which  was  exercised  by 
the  firms  which  purchased  the  bonds.  They  brought  into 
their  syndicate  the  leading  gold  shipping  houses,  and  for- 
eign bills  of  exchange  were  placed  upon  the  market  for 
several  months  in  just  sufficient  quantities  to  meet  the  cur- 
rent demand.  The  syndicate  by  this  process  created  debts 
in  Kurope  which  it  was  necessary  to  cover  at  some  time  by 
the  purchase  of  exchange  or  the  shipment  of  gold.  They 
guarded  in  a  measure  against  possible  losses  by  keeping  the 
rate  for  the  bills  which  they  sold  considerably  above  the 
gold  shipping  point.  They  thus,  in  effect,  created  a  corner 
in  foreign  exchange  and  imposed  the  cost  of  their  operations 
upon  the  purchasers  of  foreign  bills.  This  method  of  con- 
trolling exchange  operated  with  wonderful  success  all 
through  the  spring  and  up  to  the  closing  days  of  July.  The 
tide  of  gold  exports,  which  rose  to  $24, 698, 489  in  the  month 
of  January,  was  turned  into  net  imports  by  the  operations 
of  the  syndicate  in  bringing  gold  from  Kurope.  February 
showed  net  imports  of  $4,067,003  ;  March,  net  imports  of 
$4,120,290;  April,  net  imports  of  $2,029,761  ;  May,  net  im- 
of  $3,271,193  ;  and  June,  net  imports  of  $1,963,750.  The 
effect  upon  the  treasury  was  equally  striking.  The  redemp- 
tions of  United  States  legal  tender  notes  in  gold,  which  had 
been  $45,117,738  in  January,  were  reduced  to  $5,560,952  in 
February,  $1,089,085  in  March,  $[,017,571  in  April,  $1,166,- 
472  in  May,  and  $1,239,287  in  June. 

The  essential  purpose  of  the  contract,  in  spite  of  criticisms 


692          HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

to  which  it  was  justly  subject,  was  to  afford  a  breathing 
spell  to  the  country  for  the  restoration  of  confidence  in  the 
monetary  standard  and  in  the  business  future.  The  period 
of  business  depression  beginning  in  1893  had  lasted  long 
enough  to  exhaust  idle  stocks  of  goods,  to  accumulate  capi- 
tal in  the  banks,  and  to  prepare  the  business  community  for 
a  new  period  of  activity  if  confidence  could  be  restored.  Mr. 
J.  Pierpont  Morgan,  the  eminent  financier  who  was  the 
leading  spirit  in  the  arrangement,  would  probably  have  made 
no  attempt  to  restore  confidence  and  business  activity  by 
similar  methods  in  the  spring  of  1893  or  of  1894,  but  he 
counted  upon  the  probabilities  of  success  in  such  an  under- 
taking in  1895,  and  events  partially  justified  his  judgment. 
The  loans  and  discounts  of  the  national  banks  of  the  City 
of  New  York  increased  from  $332,069,999  on  March  5,  1895, 
to  $363,848,573  on  September  28,  1895,  while  the  loans  and 
discounts  of  all  the  national  banks  of  the  country  advanced 
in  the  same  interval  from  $1,965,375,368  to  $2,059,408,402. 
The  imports  for  the  calendar  year  1895  were  $801,663,490, 
an  increase  of  $125,000,000  over  1894,  an^  only  $39,000,000 
less  than  in  the  prosperous  year  1892.  Receipts  for  postage, 
an  unfailing  index  of  business  conditions,  increased  in  every 
quarter  of  1895  over  tne  corresponding  quarter  of  1894,  and 
reached  for  the  concluding  quarter  of  the  year  a  total  of 
$20,517,014,  the  largest  volume  of  business  ever  recorded. 

The  essential  defects  of  the  policy  of  the  syndicate  con- 
tract were  its  failure  to  diminish  the  redundant  volume  of 
currency,  the  stimulus  thus  afforded  to  imports  over  exports, 
and  the  artificial  nature  of  the  attempt  to  corner  the  exchange 
market.  This  attempt  practically  broke  down  towards  the 
close  of  July.  A  leading  coffee  firm  which  had  payments 
to  make  in  Kurope  found  that  they  could  be  made  cheaper 
by  the  shipment  of  gold  drawn  from  the  Treasury  than  by 
the  purchase  of  exchange  at  the  rates  fixed  by  the  syndi- 
cate. One  of  the  syndicate  firms  was  also  compelled  to  ship 
gold  withdrawn  from  the  Treasury,  in  order  to  cover  the  bills 
of  exchange  which  they  had  sold.  The  syndicate  had  been 
released  from  a  part  of  the  obligation  to  bring  half  the  gold 


THE   CRISIS  OF  1893.  693 

in  payment  for  the  bonds  from  abroad,  and  had  completed 
their  deliveries  under  the  contract  on  June  24,  1895.  Mem- 
bers of  the  syndicate  still  held  considerable  quantities  of 
gold,  and  the  first  exports  were  made  up  by  voluntary 
deposits  of  this  gold  in  the  Treasury,  amounting  up  to 
September  n,  1895,  to  $I6>I27A32-  These  deposits  several 
times  restored  the  reserve  to  $100,000,000,  when  it  was  on 
the  point  of  falling  below  that  amount,  but  the  reserve 
slowly  travelled  downward  from  $107,512,362  at  the  end  of 
June  to  $92,943,179  at  the  end  of  October. 

The  loss  of  control  over  the  exchange  market  practically 
terminated  the  efforts  of  the  syndicate  to  maintain  the  re- 
serve, in  spite  of  their  voluntary  gold  deposits.  The  gold 
obtained  for  shipment  continued  to  be  drawn  almost  ex- 
clusively from  the  Treasury,  the  net  exports  were  $13,468,- 
188  in  November  and  $14,170,899  in  December,  and  the  gold 
reserve  fell  to  $63,262,268  on  December  31,  1895.  President 
Cleveland  in  the  meantime  delivered  to  Congress  on  Decem- 
ber 3d,  his  annual  message,  laying  special  stress  upon  the 
importance  of  retiring,  by  means  of  a  bond  issue,  the  legal 
tender  notes,  which  were  presented  over  and  over  again  to 
the  Treasury  for  redemption  and  were  required  by  the  Act  of 
May  31,  1878,  to  be  "  re-issued  and  paid  out  again  and  kept 
in  circulation. ' '  Congress  gave  no  indication  of  compliance 
with  this  recommendation,  and  the  raid  upon  the  gold  re- 
serve increased  in  intensity  after  the  delivery  of  the  special 
message  of  the  President  upon  the  encroachments  of  Great 
Britain  upon  the  Venezuelan  boundary.  The  possibility  of 
war  between  Great  Britain  and  the  United  States  led  Eng- 
lish investors  to  unload  American  securities,  caused  large 
withdrawals  of  gold  from  the  Treasury  for  export,  and 
brought  the  country  to  the  verge  of  the  suspension  of  gold 
payments.  The  President,  on  December  2oth,  called  the 
attention  of  Congress  in  a  special  message  to  the  serious 
financial  condition  of  the  country  and  urged  that  they  should 
not  take  a  recess  for  the  holidays  without  taking  some  step 
for  the  protection  of  the  public  credit.  An  effort  was  made 
by  Congress  to  pass  some  legislation,  but  it  was  not  satis- 


694          HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

factory  at  any  time  to  the  administration,  because  provision 
was  not  made  for  the  issue  of  bonds  specifically  payable  in 
gold  nor  for  the  retirement  of  legal  tender  notes.  It  soon 
appeared  that  the  Senate  and  House  could  not  agree  upon 
any  measure  between  themselves,  and  the  President  and 
Secretary  of  the  Treasury  determined  upon  another  issue  of 
bonds  under  the  existing  law. 

A  public  call  for  subscriptions  to  $100,000,000  of  four  per 
cent,  coin  bonds,  dated  February  i,  1895,  and  payable  at  the 
pleasure  of  the  United  States  after  thirty  years,  was  issued 
by  Secretary  Carlisle  on  January  5,  1896.  There  was  some 
doubt  at  first  among  financiers  whether  the  subscriptions 
from  responsible  holders  of  gold  would  be  sufficient  to  per- 
manently restore  the  gold  reserve.  Mr.  J.  Pierpont  Morgan 
had  been  organizing  a  syndicate,  in  the  hope  of  making  a 
contract  with  the  government  similar  to  that  of  1895,  an(i  tne 
fact  that  he  intended  to  obtain  gold  for  the  execution  of  his 
part  of  the  contract  from  outside  the  Treasury  gave  the  plan, 
in  the  opinion  of  many  financiers,  an  advantage  over  a  popu- 
lar loan.  The  response  to  the  call  of  Secretary  Carlisle, 
however,  when  the  bids  were  opened  on  February  5th,  was 
such  as  to  dissipate  such  fears  and  to  materially  strengthen 
the  public  credit.  The  number  of  subscriptions  of  an  appar- 
ently bonafide  character  was  four  thousand  six  hundred  and 
forty,  and  the  amount  was  $568, 269, 850.  A  syndicate  headed 
by  Mr.  Morgan  subscribed  for  the  entire  amount  at  110.6877. 
It  was  found  that  there  were  subscriptions  for  $66,788,650  at 
higher  figures,  so  that  Mr.  Morgan's  syndicate  were  allotted 
only  the  remainder  of  the  $100,000,000.  Subsequent  defaults 
on  the  part  of  some  of  the  subscribers  raised  Mr.  Morgan's 
allotment  to  about  $38,000,000  and  made  the  net  proceeds 
of  the  loan  about  $111,250,000.  The  gold  reserve  of  the 
Treasury  was  rapidly  increased  by  the  deposit  of  gold  in 
payment  for  the  bonds  and  rose  on  March  17,  1896,  to  $127,- 
862,644.  The  loan  appeared  to  afford  some  of  the  advan- 
tages in  restoring  business  confidence  afforded  by  the 
syndicate  contract  of  1895.  Business  showed  increased 
activity,  and  net  exports  of  gold  fell  off  until  revived  by  agi- 


THE   CRISIS  OF  1893.  69$ 

tation  regarding  the  maintenance  of  the  metallic  standard. 
This  outward  movement  was  checked  by  the  banks  and  ex- 
change houses  and  the  reserve  again  increased  during  the 
autumn  of  1896. 

The  crisis  in  Australia  in  1893  was  one  of  those  peculiar 
to  new  countries.  The  future  had  been  too  rapidly  dis- 
counted, speculation  in  land  had  been  carried  beyond  the 
possibility  of  the  immediate  development  of  the  country 
and  an  enormous  debt  had  been  created  for  public  works. 
Competition  in  banking  had  been  carried  to  such  an  extreme 
that  nearly  every  little  community  supported  branches  of 
all  the  leading  banks,  and  obtained  excessive  loans  on  prop- 
erty which  could  not  be  converted  into  quick  assets.  Not 
content  with  loaning  their  own  funds  in  this  way,  the  Aus- 
tralian banks  established  agencies  all  over  the  United  King- 
dom, with  some  local  solicitor  or  stock  broker  as  agent,  and 
paid  commissions  to  obtain  deposits.  When  the  crisis  broke 
out  in  January  1893,  the  British  deposits  in  the  Australian 
banks  were  about  one-third  of  the  total  deposits  of  ^153,  - 
000,000.  Foreign  money  had  poured  into  Australia  under 
the  conviction  among  British  investors  that  investments 
among  those  of  their  own  blood  were  safer  than  among  the 
South  American  republics  or  the  decrepit  nations  of  Eastern 
and  Southern  Europe. 

This  easy  accession  of  riches  came  to  be  counted  by  the 
Australians  as  part  and  parcel  of  their  own  accumulations. 
A  circular  issued  on  behalf  of  a  public  loan  for  the  colony 
of  Victoria  in  1892  counted  up  the  wealth  of  the  people  at 
^440,000,000  or  at  the  rate  of  nearly  ^400  for  each  of  the 
1,140,000  inhabitants.  This  valuation  was  more  than  fifty 
per  cent,  greater  per  capita  than  that  of  Great  Britain,  after 
centuries  of  accumulation,  but  it  was  made  up  by  appraising 
unsettled  lands  at  £2  per  acre  which  could  not  be  sold  to- 
day for  £i  and  by  a  similar  process  of  inflation  of  bank 
credits  and  personal  wealth.1  The  City  of  Melbourne,  with 
its  population  of  500,000,  was  extended  on  the  maps  of  the 
land  speculators  to  limits  which  would  have  afforded  ample 


1  Raffalovich,  Le  Marche  Financier  en  1893*94,  3O5- 


696          HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

accommodations  for  a  city  with  twice  the  population  of 
I/Dndon.  The  feeling  of  affluence  which  such  figures  caused 
had  encouraged  the  creation  of  a  public  debt  of  about  ,£34  per 
head,  almost  exactly  twice  the  enormous  public  debt  of  the 
United  Kingdom. 

Stubborn  facts  did  not  bear  out  these  inflated  valuations 
and  the  adoption  of  the  protective  policy  in  a  country  where 
manufacturing  had  hardly  been  born  added  to  the  fetters 
upon  consumption,  whatever  might  be  expected  from  its 
final  results  in  developing  native  industries.  The  revision 
of  the  tariff  in  1892  was  made  with  the  avowed  purpose  of 
obtaining  additional  revenue  to  meet  the  charges  on  the  for- 
eign debt,  but  its  results  were  to  reduce  the  customs  receipts 
for  the  fiscal  year  1893  by  about  ,£250,000.  Warnings 
against  the  land  boom  were  given  several  years  before 
the  crisis  of  1893,  but  many  of  the  banks  had  plunged  in 
so  deep  and  tied  up  so  large  a  proportion  of  their  assets  in 
landed  security  that  they  dared  not  take  a  backward  step. 
Advances  once  made  on  land  were  increased  in  proportion  to 
the  fictitious  value  reached  by  speculation,  the  discount  on 
the  added  loan  was  deducted  from  the  new  advance  to  the 
borrower,  and  this  actual  increase  in  the  risk  of  the  bank 
was  carried  to  the  fictitious  account  of  earnings  and  profit.1 

A  large  proportion  of  the  British  deposits  which  had  been 
secured  through  agents  were  owned  in  Scotland  and  fell  due 
on  the  half  yearly  term  days.  Every  half  year  represented 
a  critical  point  in-  Australian  banking  and  none  looked  more 
critical  as  it  drew  near  than  the  Whitsunday  term  of  1893. 
The  danger  was  so  threatening,  that  some  of  the  banks 
would  be  compelled  to  suspend,  by  demands  from  Scotland, 
that  Australian  depositors  began  to  withdraw  their  accounts 
and  thus  brought  about  the  collapse  which  might  otherwise 
have  been  again  postponed.  The  signal  of  the  actual  crash 
came  on  January  29th,  when  the  Federal  Bank  of  Melbourne 
failed.  It  was  a  new  institution,  with  limited  capital,  long 
looked  upon  with  distrust  by  the  older  banks,  and  a  strong 

1  Sydney  J.  Murray,  London  Bankers1  Magazine,  Oct.,  1895, 
479- 


THE   CRISIS  OF  ifyj.  697 

effort  was  made  to  create  the  impression  that  the  failure  had 
simply  cleared  the  air  and  left  the  older  institutions  stronger 
than  before.  The  public  refused  to  accept  this  view  of  the 
case  and  gradually  began  to  withdraw  their  deposits  from  all 
the  banks.  Notices  of  withdrawal  poured  in  from  Great 
Britain,  and  on  April  4th  the  Commercial  Bank  of  Austra- 
lasia closed  its  doors,  with  deposits  of  ^12,044,000.  The 
English  and  Australian  Bank,  with  deposits  of  ^"5, 795,000 
and  ninety-one  branches,  stopped  payment  on  April  i2th,  and 
the  London  Chartered  Bank,  with  deposits  of  ;£6, 588,000 
and  fifty-eight  branches,  closed  its  doors  during  the  next 
week.  The  government  proclaimed  a  five  days'  holiday 
early  in  May,  in  the  hope  that  public  excitement  would  sub- 
side while  the  banks  were  enjoying  a  breathing  spell.  But 
banks  continued  to  go  down,  and  when  the  last  failure  oc- 
curred on  May  iyth,  fourteen  institutions  had  failed  with 
aggregate  deposits  of  ^85,000,000,  including  ^26,000,000 
owed  in  Great  Britain. 

Twelve  banks,  with  deposits  before  the  panic  of  ^71,000,- 
ooo,  succeeded  in  weathering  the  storm  and  did  much  to  re- 
store confidence  by  their  refusal  to  avail  themselves  of  some 
of  the  devices  of  the  weaker  institutions.  The  government 
of  New  South  Wales  made  bank-notes  a  legal  tender  for  six 
months,  which  enabled  the  banks,  without  increasing  circu- 
lation more  than  ten  per  cent.,  to  come  to  the  relief  of  com- 
merce by  liberal  loans.  The  surplus  of  loanable  capital  in 
Europe  brought  some  relief,  when  the  substantial  character 
of  the  assets  of  the  stronger  banks  became  known,  and  plans 
of  reconstruction  were  soon  set  in  motion.1 


Ivondon  Bankers'  Magazine,  May,  1895,  I/IX.,  715. 


CHAPTER  XXV. 

THE  CRISIS  OF   1907. 

Industrial  Progress  after  1893  in  the  United  States  and  Europe — 
Economic  Waste  of  the  Wars  in  South  Africa  and  the  East — 
Great  Output  of  Corporation  Securities — Effect  of  the  Increase 
in  Gold  Production — Bank  Troubles  in  Germany — Weaknesses 
of  the  American  Financial  Organization — The  Stock  Market  Re- 
actions of  1901  and  1903 — "The  Silent  Panic"  of  March,  1907 — 
The  Bank  Failures  of  October — Suspension  of  Currency  Pay- 
ments and  Issue  of  Clearing-House  Certificates — Treasury 
Measures  of  Relief — Conditions  at  the  close  of  1908. 

RECOVERY  from  the  crisis  of  1893  was  delayed  in  the 
United  States  by  the  uncertainty  attending  the  Presi- 
dential election  of  1896.      The  declaration   of  the 
regular  Democratic  convention  of  that  year  in  favor  of  the 
free  coinage  of  silver  caused  such  anxiety  among  business 
men,  who  desired  to  adhere  to  the  gold  standard,  that  prac- 
tically  no  new   enterprises  were  undertaken  or  projected 
until,  a  few  weeks  before  the  election,  it  became  certain  that 
the  Republican  candidates,  who  stood  upon  a  platform  in 
favor  of  the  existing  gold  standard,  would  be  elected. 

After  the  inauguration  of  President  McKinley  on  March 
4,  1897,  confidence  was  gradually  restored,  and  presently 
began  a  revival  of  business  activity.  Exports  of  merchan- 
dise, which  amounted  in  the  fiscal  year  1896  to  $882,606,938, 
rose  in  1898  to  $1,231,482,330;  in  1900  to  $1,394,483,082; 
and  finally,  in  1906,  after  only  moderate  changes  in  inter- 
vening years,  to  $1,743, 864> 5°°>  and  in  1907  to  $1,880,851, 078. 
Imports  of  merchandise,  which  in  1896  were  only  $779,724,- 
674,  did  not  feel  the  impulse  of  reviving  prosperity  until  the 

698 


THE   CRISIS  OF  iqOJ.  699 


movement  of  expansion  was  well  advanced,  but  in  1900  the 
amount  was  $849,941,184;  in  1903,  $1,025,719,237;  and 
finally  in  1906,  $1,226,562,446  ;  and  in  1907,  $1,434,421,425. 
The  ratio  of  imports  per  capita,  which  in  1898  had  been  as 
low  as  $8.05,  rose  for  1907  to  more  than  double  this  ratio, 
or  $16.54.  Internal  trade  also  increased  in  great  proportions 
and  banking  operations  expanded  in  harmony  with  the. 
expansion  of  business.  Clearings  at  New  York,  which 
were  $29,350,894,000  in  1896,  and  $51,964,588,000  in  1900, 
increased  in  1907  to  $95,315,421,000  while  for  the  country 
at  large  they  increased  from  $51,935,651,000  in  1896  and 
$8  1,  582,  450,000  in  1900,  to  $154,662,515,000  in  1907.  The 
volume  of  money  in  circulation  rose  from  $1,506,434,966  in 
1896  to  $2,055,  150,998  in  1900,  and  $2,772,956,455  in  1907. 
Individual  deposits  in  national  banks  increased  from  $1,668,- 
413,507  in  1896  to  $2,458,092,737  in  1900,  and  $4,322,880,  141 
in  1907. 

In  other  commercial  countries  also  progress  was  rapid 
during  the  ten  years  ending  with.  1907,  but  was  checked  in 
several  cases  by  war  and  other  special  circumstances. 
Among  the  most  conspicuous  of  these  influences  were  the 
effects  of  the  war  in  South  Africa  upon  Great  Britain,  from 
1898  to  1902,  and  the  effects  of  the  war  between  Russia  and 
Japan,  in  1904-1905.  The  war  in  South  Africa  cost  the 
British  Government  nearly  $800,000,000  and  resulted  in 
loans  to  the  amount  of  nearly  $6oo,ooo,ooo.1  The  effect 
was  severely  felt  in  the  money  market  in  restricting  the 
supply  of  capital  for  other  classes  of  investments.  Kspecially 
was  the  issue  of  large  quantities  of  new  securities  felt  upon 
the  price  of  British  consols.  Quotations  had  been  as  high  in 
1896  as  ii4X'  The  reduction  of  the  interest  rate  from  2^ 
to  2^£  per  cent,  took  effect  in  1903  and  had  some  influence 
in  depressing  prices,  but  the  influences  which  were  most 
potent  in  carrying  down  consols  to  a  minimum  price  of  91 
in  1901,  and  80^  in  the  autumn  of  1907,  were  the  great 
demands  for  capital  and  the  increase  in  the  amount  of 
consols  on  the  market. 

1   Vide  Bulletin  de  Statistique,  April,  1902,  LI.,  485. 


7OO          HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

The  war  between  Russia  and  Japan  over  the  control  of 
Manchuria  began  in  February,  1904,  and  hostilities  prac- 
tically ceased  in  June,  1905.  The  attack  of  the  Japanese 
upon  the  Russians  was  followed  by  a  serious  break  in  the 
markets  of  Paris  and  Berlin,  but  partial  recovery  soon  took 
place.  The  estimated  cost  of  the  war  to  Russia  was  about 
$840,000,000,  but  this  did  not  represent  the  disbursements 
after  the  peace.1  The  cost  to  Japan,  up  to  the  close  of  1906, 
was  officially  calculated  at  about  $1,000,000,000. 7  The  war 
between  Spain  and  the  United  States  in  1898,  though  of 
minor  importance,  cost  the  United  States  about  $165,000,000,* 
and  for  a  time  seriously  impaired  Spanish  credit.  Thus,  in 
these  several  conflicts  in  arms  were  expended  not  less  than 
$2,800,000,000,  making  demands  upon  the  savings  of  the 
world  equal  to  more  than  the  usual  output  of  all  classes  of 
securities  for  an  entire  year. 

Coincident  with  this  great  destruction  of  wealth  in  war 
was  an  unprecedented  demand  for  capital  for  new  industrial 
enterprises.  As  usual  in  periods  of  expanding  trade,  the 
resources  applied  to  these  enterprises  were  converted  in  ex- 
cessive'amounts  into  fixed  forms  and  the  supply  of  circu- 
lating capital  became  deficient.  A  period  of  redundant 
capital  followed  the  prostration  of  1893.  During  this  period, 
when  interest  rates  in  Europe  sunk  to  2  or  3  per  cent,  and 
important  government  loans  were  refunded  at  low  rates, 
refunding  operations  constituted  a  large  proportion  of  the 
issues  of  new  securities.  When  rates  for  money  rose,  how- 
ever, and  capital  began  to  become  scarce,  about  1897,  refund- 
ing operations  substantially  ceased.  They  were  resumed  to 
some  extent  in  1902  and  1903,  chiefly  in  the  case  of  impor- 
tant government  loans,  but  were  again  brought  substantially 
to  a  halt  in  the  next  two  years.  In  the  table  given  below, 
based  upon  the  figures  of  the  Moniteur  des  Inter £ts  Mate'riels, 
total  issues  of  all  classes  of  securities  are  given,  with  con- 

1  Raffalovich,  Marche  Financier  en  igo5-o6>  450. 
*  Report  on  the  War  Finance,  1906,  12. 

8  Report  of  the  Treasurer  of  the  United  States,  Finance  Report, 
1898,7- 


THE   CRISIS  OF  ipof.  JOl 


version  or  refunding  issues,  followed  for  each  year  by  the 
net  new  demands  for  capital  obtained  by  deducting  conver- 
sions from  total  issues  : 

ISSUES  OF  NEW  SECURITIES,  1896-1906. 

Net  new 
demands 

Year.                    Total  issues.  Conversions.               for  capital. 

1896  ..........  $3,227,359,o7i  $1,465,451,600           $1,761,907,451 

1897  ...........  1,852,173,846  132,182,873      1,719,991,013 

1898  ...........  2,034,766,348  316,530,453      1,718,235,895 

1899  ..........  2,175,823,434  120,873,970     2,054,949,464 

1900  ...........  2,289,642,963  ..........      2,289,642,953 

1901  ...........  1,917,916,282  ..........      1,917,916,282 

1902  ..........  3,597,489,052  1,639,921,000      1,957,568,052 

1903  .......  -----  3,534,248,906  1,687,729,387     1,846,519,519 

1904  ...........  2,785,138,525  353,445,223     2,431,693,302 

1905  ...........  3,688,124,622  323,487,879      3>36;,636,743 

1906  ...........  5,126,000,000  2,001,000,000  3,125,000,000 

These  figures  show  that,  while  new  demands  for  capital 
were  comparatively  uniform  from  1896  down  to  1903,  they 
increased  to  an  enormous  extent  during  the  next  three  years. 
Hence  came  the  strain  which  was  felt  in  the  market  for 
capital  in  Great  Britain  and  Germany  as  well  as  in  America. 
In  the  United  States  issues  of  the  negotiable  securities  of  cor- 
porations —  stocks  and  bonds  —  multiplied  much  more  rapidly 
than  the  total  mass  of  tangible  physical  property,  whose 
value  was  computed  in  1904  at  $107,104,211,917.  This 
increase  in  security  issues  gave  an  appearance  of  fluidity  to 
the  capital  of  the  country,  which  was  in  some  respects 
deceptive.  While  securities  are  themselves  readily  nego- 
tiable under  normal  conditions,  they  represent  fixed  capital 
and  not  circulating  capital.  Stocks  are  the  title  to  shares  in 
permanent  investments,  like  railways,  factories,  and  build- 
ings. Bonds  usually  represent  the  obligations  which  have 
been  issued  to  acquire  fixed  capital  and  are  secured  by 
mortgages  upon  railway  mileage,  factories,  and  buildings. 
The  conversion  of  circulating  capital  into  these  fixed  forms 
proceeded  at  a  remarkable  rate  after  the  recovery  from  indus- 


702          HISTORY  OF  MODERN  BAKKS  OF  ISSUE. 

trial  depression  about  the  year  1900.  Careful  calculations 
show  the  principal  securities  outstanding  in  the  United  States 
even  in  1905  to  have  been  about  $35,000,000,000  par  value. 
Among  the  chief  items  were  the  following  : 

PAR  VALUE  OF  OUTSTANDING  SECURITIES  IN  THE 
UNITED  STATES,  1905. 

Class  of  securities.  Par  value. 

Government  debt $  3,265,000,000 

Steam  railways 12,600,000,000 

Street  railways 3,200,000,000 

National  banks  800,000,000 

Other  banks 650,000,000 

Manufactures 6,800,000,000 

Mining,  oil,  etc 3,300,000,000 

Other  classes 4,385,000,000 

Total $35,000,000,000 

The  amount  of  securities  outstanding  throughout  the 
world  as  early  as  1900  was  estimated  at  about  $110,000,- 
000,000,  or  more  than  the  entire  wealth  of  the  United  States. 
Great  Britain  was  credited  with  $26,400,000,000,  or  $616.97 
per  capita ;  France  with  $19,500,000,000,  or  $500.94  per 
capita ;  and  Germany  with  $10,000,000,000,  or  $177.41  per 
capita.1  To  these  amounts  great  additions  were  made  dur- 
ing the  following  seven  years.  In  Great  Britain  alone  issues 
of  new  capital  were  estimated  for  the  five  years  ending  with 
1904  at  $3,454,978,975,  but  this  included  a  considerable 
amount  in  foreign  securities  offered  on  the  London  market. 
In  the  United  States  calls  for  new  company  capital  were  com- 
puted for  1904,  at  $1,003,542,200;  for  1905,  $1,694,187,211  ; 
for  1906,  $2,307,970,000;  and  for  1907,  $i,459,325,ooo.2 
Into  Russia  was  poured  in  a  few  years  French  capital  to 
the  amount  of  at  least  $200,000,000. 

1  For  further  details,  vide  article  by  the  author,  "  The  World's 
Wealth  in  Negotiable  Securities,"  Atlantic  Monthly,  January,  1908, 
CI,  97- 

8  New  York  Journal  of  Commerce,  January  2,  1908.  Annual 
Review,  second  section,  p.  10. 


THE   CRISIS  OF  I^Of.  703 

A  great  increase  in  the  output  of  gold  from  the  mines 
contributed  its  share  for  a  dozen  years  to  the  rise  of  prices 
and  the  encouragement  of  speculation.  The  average  annual 
production  of  gold  for  the  twenty  years  ending  with  1890 
was  $110,544,000.  Then  for  the  twelve  years  ending  with 
1902  came  an  annual  average  production  of  $22 1,635,000. 
The  total  production  during  these  twelve  years  was  $2,659,- 
624,000,  which  was  nearly  30  per  cent,  of  the  total  produc- 
tion for  the  long  span  of  four  centuries  ending  with  1890.' 
The  production  of  the  next  five  years  exceeded  $1,850,000,- 
ooo.  Official  estimates  for  these  five  years  are  as  follows  : 

GOLD  PRODUCTION  OF  THE  WORLD. 
1903-1907. 

Year.  Value. 

1903 $327,702,700 

i9°4 347,087,300 

I9°5 376,289,200 

i9°6 400,342,  loo 

1907 404,000,000 


Total $1,855,421,300 

When  this  prodigious  total  for  five  years  is  added  to  the 
production  of  the  previous  twelve  years,  a  total  is  obtained 
for  seventeen  years  of  $4,515,046,000.  Thus,  within  less 
than  twenty  years,  production  reached  an  amount  equivalent 
to  more  than  half  of  the  entire  production  of  the  preceding 
four  centuries.  Even  these  figures  do  not  reveal  the  in- 
crease in  the  proportion  available  for  money,  which  bore  a 
much  greater  ratio  to  the  pre-existing  stock.  The  amount 
required  for  the  arts  made  progress  from  year  to  year,  but 
did  not  keep  pace  with  the  ratio  of  production.  If  in  1890 
about  $60,000,000  was  absorbed  throughout  the  world  for 
industrial  purposes  and  the  arts,  only  about  $50,000,000  of 
the  annual  product  was  left  available  for  additions  to  the 
monetary  stock ;  while  in  1906,  even  with  a  consumption  in 

1  Vide  the  figures  in  detail  in  the  author's  Principles  of  Money  and 
Banking,  i.,  89. 


704          HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

the  arts  estimated  at  $121,601,200,  the  amount  left  available 
as  money  was  about  $279,000,000,  or  more  than  five  times 
the  average  of  the  years  ending  with  1890.' 

It  would  be  natural,  under  any  theory  of  money,  that  this 
great  addition  to  the  monetary  stock  should  have  some 
effect  upon  prices  and  the  condition  of  credit.  Funda- 
mentally, it  is  the  supply  of  other  things  than  gold  which 
determines  the  ability  of  a  community  to  build  railways, 
houses,  and  factories.  It  requires  rails  and  steel  frames  and 
machinery  and  labor.  But  the  fact  that  these  can  under 
normal  conditions  be  obtained  for  gold  obscures  the  im- 
portance of  the  part  they  play,  until  the  community  is 
brought  face  to  face 'with  scarcity  of  supply  in  relation  to 
demand  or  with  scarcity  of  consumable  goods  necessary  to 
the  ordinary  processes  of  life.  The  influx  of  new  gold  into 
bank  reserves  tends,  other  things  being  equal,  to  stimulate 
speculation  in  both  securities  and  goods,  whence  may  occur 
a  rise  in  prices.  The  fact  that  the  problem  remains  essen- 
tially one  of  capital  and  credit  rather  than  of  the  stock  of 
gold  was  demonstrated,  however,  by  the  conditions  of  the 
crisis  of  1907.  In  spite  of  the  outpour  of  gold  from  the 
mines  at  a  rate  never  equalled  or  approached  in  the  history 
of  the  race,  demand  outran  supply,  the  new  gold  did  not 
offset  the  maladjustments  of  capital,  and  the  money  market 
found  gold  an  unsatisfying  aliment  when  what  was  required 
was  more  saved  capital  in  forms  adapted  to  the  continuance 
of  production. 

The  effect  of  the  war  in  South  Africa  was  to  cause  a 
check  to  commercial  expansion  in  Europe,  which  reacted 
powerfully  upon  the  markets  of  St.  Petersburg,  Berlin,  and 
Brussels.  In  Russia,  newly  dowered  with  the  gold  standard 


1  The  figures  of  the  Mint  Bureau  as  to  the  industrial  consumption 
of  gold  differ  widely  for  different  years,  the  tendency  in  recent  years 
being  apparently  to  raise  the  amount.  Thus,  for  the  United  States 
alone  industrial  consumption  was  put  for  1898  at  $13,565,879  ;  for 
1903  at  $29,063,551  ; -and  for  1906  at  $39,126,763.  For  the  world 
the  estimate  for  1903  was  only  $76,350,600,  while  for  1906  it  was 
$121,601,200. — Finance  Report,  1907,  335. 


THE   CRISIS  OF  IQOf. 

by  the  skill  of  Count  Witte  and  encouraged  by  the  conse- 
quent influx  of  foreign  capital,  prices  rose  rapidly  in  1898 
and  1899.  The  far-sighted  Minister  of  Finance  gave  a 
warning  in  vain,  early  in  the  latter  year,  to  the  bankers  of 
St.  Petersburg  of  the  danger  of  locking  up  their  resources  in 
speculation.1  The  Bank  of  Russia  was  compelled  to  come  to 
the  rescue  of  the  market,  and  on  September  23,  1899,  there 
was  a  crash  in  bank  shares  and  industrial  securities  which 
carried  them  down  by  from  20  to  50  per  cent. 

The  loss  of  capital  in  Russian  enterprises  had  its  reaction 
in  Germany  and  Belgium,  whence  much  of  the  resources  for 
these  enterprises  had  come.  In  Germany  efforts  to  maintain 
high  prices  for  iron  and  coal  were  made  by  the  large  syndi- 
cates by  curtailing  production,  but  they  were  only  partially 
effective.2  Banks  which  had  tied  up  their  capital  in  new 
industrial  projects,  especially  electrical,  found  themselves 
unable  to  meet  their  obligations.  Two  mortgage  banks 
failed  in  the  autumn  of  1900,  because  they  had  been  specu- 
lating in  real  estate  through  subsidiary  companies.  The 
failures  caused  a  panic  in  mortgage  bonds,  which  was  most 
acute  in  the  case  of  two  companies  which  had  been  gravely 
mismanaged — the  Bank  of  Pomerania  and  the  Mortgage 
Bank  of  Mechlenberg-Strelitz.  Bonds  of  the  former  fell 
from  98^  to  77,  and  of  the  latter  from  TOO  to  49 ;  but  the 
discount  banks  came  to  their  aid  and  they  were  saved  from 
failure. 8 

On  the  heels  of  the  mortgage  bank  failures  came  diffi- 
culties in  two  large  institutions  of  a  different  character.  One 
of  these,  the  Dresdner  Creditanstalt,  was  aided  temporarily 
by  other  institutions,  but  eventually  went  into  liquidation. 
The  other,  the  Bank  of  Leipzig,  founded  in  1839,  and  having 
a  capital  of  $12,000,000  and  12,000  depositors,  went  down  at 
once.  To  a  single  industrial  syndicate,  the  Trebertrocknung 
Gesellschaft,  which  produced  and  manipulated  the  securities 

1  Raffalovich,  Les  Crises  Commerciales  et  Financieres  depuis  i 
46. 

8  L£vy,  La  Crise  Industrielle,  7. 

3  Raffalovich,  Le  Marche  Financier  en  1901-02 >  66. 

45  -        - 


706         HISTORY  Of  MODERN  BANKS  OF  ISSUE. 

of  fourteen  affiliated  companies,  advances  had  been  made 
under  various  accounts  to  the  amount  of  $21,000,000.  In- 
evitably the  head  of  the  Leipziger  Bank,  Herr  Bxner,  was 
refused  aid  when  he  sought  it  at  Berlin,  in  spite  of  the  fact 
that  its  failure  was  sure  to  cause  pressure  upon  other  institu- 
tions.1 A  serious  run  followed  upon  the  banks  of  Saxony, 
and  some  small  institutions  and  many  industrial  companies 
went  into  liquidation.  Much  money  was  lost  in  tramways 
and  other  electrical  enterprises.  Of  443,550,000  marks 
($106,000,000)  in  nominal  capital  for  twenty -one  companies, 
most  of  the  shares  being  quoted  far  above  par,  there  were 
losses  in  market  quotations  between  January  i,  1899,  and 
October  15,  1901,  which  amounted  to  270,810,000  marks 
($64,500,000),  or  61  per  cent,  of  the  earlier  quotations.8 
Gradually,  however,  liquidation  ran  its  course  and,  with  the 
help  of  the  Imperial  Bank,  affairs  returned  to  a  normal 
condition  early  in  1902. 

In  the  New  York  market  several  special  causes  of  weak- 
ness supplemented  the  general  causes,— excessive  demands 
for  capital  and  increase  in  gold  production,  which  were  stim- 
ulating speculation  throughout  the  world.  In  America, 
more  perhaps  than  anywhere  else,  the  game  of  converting 
circulating  capital  into  fixed  forms  went  merrily  on  until  the 
mercantile  community  woke  up,  in  1903,  and  again  more 
emphatically  in  1907,  to  the  fact  that  there  was  no  longer 
sufficient  circulating  capital  to  meet  legitimate  mercantile 
demands.  Several  special  causes  also,  besides  the  newness 
of  the  country,  contributed  to  make  speculation  in  America 
more  reckless  than  in  other  commercial  countries.  Among 
these  factors  were  the  concentration  of  idle  money  from  the 
West  and  South  in  New  York,  at  the  seasons  when  it  was 
not  needed  for  moving  the  crops ;  the  system  of  permitting 
reserve  deposits  by  national  banks  in  the  banks  of  New 
York,  Chicago,  and  St.  I/mis ;  the  system  of  daily  settle- 
ments on  the  New  York  Stock  Exchange ;  the  acceptance 


1  Raffalovich,  Le  Marche  Financier  en  1901-02,  48-53. 
8.  Ibidem,  187. 


THE  CRISIS  Of  IpO?.  707 

of  small  cash  margins  for  speculation  from  persons  without 
financial  responsibility  ;  and  the  absence  of  any  central 
banking  control  over  the  discount  rate  or  the  movement  of 
gold. 

The  defects  of  the  American  currency  system  appear  at 
their  worst  in  periods  of  panic.  The  inelasticity  of  the 
bank-note  currency,  coupled  with  the  provisions  of  law 
governing  the  reserve  system,  cause  a  strain  against  which 
neither  the  law  nor  the  actual  workings  of  the  system  afford 
any  safeguard.  From  1897  to  1907,  a  new  element  of  weak- 
ness was  injected  into  the  situation  by  the  great  develop- 
ment of  trust  companies  and  State  banks,  without  any  proper 
correlation  to  the  national  banking  system.  These  State 
institutions  were  not  only  not  required  to  keep  adequate  re- 
serves, but  even  the  reserves  required  were  permitted  to  be 
kept  in  bank-notes.  Thus  their  deposit  and  credit  operations 
were  capable  of  expanding  to  enormous  proportions  without 
any  definite  relation  to  gold.  And  such  an  expansion  actually 
occurred.  Within  seven  years,  from  1900  to  1907,  total 
liabilities  of  State  banking  institutions  and  trust  companies 
expanded  by  more  than  five  thousand  millions  of  dollars, 
while  cash  reserves  expanded  by  only  about  $i  71,0x30,000,  and 
national  bank-note  issues  expanded  by  about  $440,000,000. l 
As  these  bank-notes  are  secured  by  evidences  of  the  public 
debt  and  not  to  any  appreciable  extent  by  gold  reserves, 
it  becomes  apparent  how  one  form  of  credit  was  built 
upon  another,  until  the  whole  fabric  became  a  house  of  cards 
which  a  zephyr  might  topple  in  ruins. 

And  to  this  fragile  nature  of  the  structure  was  added  the 
fact  that  there  was  no  refuge  to  which  to  look  in  time  of 

1  Vide  article  by  the  present  author  on  "  The  Lessons  of  the  Panic," 
in  North  American  Review,  February,  1908,  ClyXXXVII.,  180.  The 
figures  of  State  banking  expansion  were  as  follows  : 

GROWTH  OF  STATE  BANKING. 

I90O.  1907. 

Number  of  institutions  9.5*9  13*317 

Total  resources 15,841,658,820        $11,168,514,516 

Cash  reserves $220,667,109  $391,847,497 


708         HISTORY  OF  MODERN  BAtfKS  OF  ISSUE. 

storm,  like  the  central  banks  of  Europe,  nor  even  a  system 
of  co-operation  for  guarding  against  a  common  danger.  -For 
the  national  banks,  and  a  few  of  the  State  banks  of  New 
York  city,  there  did  indeed  exist  the  Clearing- House  Com- 
mittee, and  through  its  existence  it  became  possible  to  take 
certain  steps  to  avert  shipwreck  after  the  storm  had  reached 
its  worst ;  but  among  the  trust  companies  there  was  not  even 
this  slender  bond  of  union.  When  the  Clearing  House 
required  of  New  York  city  trust  companies,  early  in  1903 
that  they  should  gradually  accumulate  ten  per  cent,  in  cash 
reserves  against  their  demand  deposits,  they  withdrew  from 
the  Clearing  House  rather  than  comply  with  the  require- 
ment '  ;  and  they  made  no  move  to  secure  reinstatement 
after  the  State  Legislature  in  1906  required  of  all  such  com- 
panies a  reserve  of  fifteen  per  cent.,  of  which  only  one  third, 
however,  need  be  in  cash,  and  the  other  two -thirds  might  be 
respectively  on  deposit  in  other  banking  institutions  or  in- 
vested in  prescribed  securities.  In  this  position  of  expansion 
and  of  isolation,  therefore,  stood  the  trust  companies  when 
the  storm  of  1907  broke,  adding  a  portentous  burden  to  the 
structure  of  credit  sustained  by  the  reserves  of  the  national 
banks,  upon  which  the  entire  structure  thus  ultimately 
rested. 

The  speculative  field  was  greatly  widened  in  the  United 
States  by  the  conversion  of  private  manufacturing  enterprises 
into  stock  companies  and  the  grouping  of  these  companies 
by  consolidation  into  the  dominating  factors  in  their  special 
industries.  Large  issues  of  securities  for  ' '  good  will ' '  be- 
came necessary  in  order  to  acquire  properties  which  might 
otherwise  prove  dangerous  competitors,  and  the  securities 
thus  issued  became  the  subject  of  active  speculation  for  the 
rise  on  the  stock  exchanges.  Already,  as  early  as  1900, 
the  number  of  industrial  companies  classified  by  the  Census 
as  "combinations"  was  183,  with  capital  actually  issued  to 
the  amount  of  $3,085,200,868.  a  By  the  year  1904,  the 

'For  details  of  this  action  ,"  vide  New  York  Bankers'  Magazine, 
March,  1903,  LXVI.,  395. 
8  Final  report  of  the  Industrial  Commission,  XIX.,  601. 


THE   CRISIS  OF 


amount  of  capital,  including  bonds,  of  305  "industrial 
trusts,"  was  estimated  at  $6,717,791,533.  '  Of  these  the 
greatest,  and  in  many  ways  the  typical  consolidation  was 
the  United  States  Steel  Corporation,  formed  in  1901  by  the 
skill  of  Mr.  J.  Pierpont  Morgan  and  representing  capital  and 
bond  issues  of  nearly  $1,400,000,000. 

It  was  inevitable  that  the  conspicuous  creation  of  such  a 
mass  of  new  securities  should  draw  into  the  maelstrom  of 
stock  exchange  speculation  a  new  public  which  had  not  been 
there  before,  that  prices  of  securities  should  be  forced  by  ex- 
travagant expectations  to  heights  not  warranted  by  real 
value,  and  that  the  market  should  react  violently  under 
every  sudden  gust  of  adverse  influence.  Such  a  reaction,  of 
extreme  violence,  took  place  on  the  gth  of  May,  1901,  but  it 
was  due  to  a  single  episode  in  stock  exchange  speculation 
which  had  an  economic  character  only  in  the  sense  that  it  was 
typical  of  many  similar  operations.  a  A  struggle  for  control 
of  the  Northern  Pacific  Railway  between  the  rival  Morgan 
and  Hill  interests  led  to  a  rapid  advance  in  the  stock,  and 
large  "short"  sales.  The  price,  from  45^  in  September, 
1900,  advanced  under  steady  buying  to  149^  on  May  7,  1901, 
and  on  the  next  day  to  180.  Then  the  fact  dawned  upon  the 
market  that  to  two  banking  houses  alone  more  stock  had 
been  sold  than  was  available  for  delivery.  The  stock  was 
'  '  cornered.  "  3  A  violent  scramble  to  obtain  the  stock  at 
almost  any  price  to  make  deliveries  caused  other  securities 
to  be  thrown  on  the  market  at  a  sacrifice,  and  advanced 
Northern  Pacific  to  1000.  As  compared  with  the  prices  of 
two  days  before,  Atchison  declined  44^  points  ;  St.  Paul, 
53  ;  New  York  Central,  25  ;  Southern  Pacific,  27^  ;  Amal- 
gamated Copper,  33^4.  Money  rose  for  a  moment  to  75  per 
cent,  and  President  Tappen  of  the  Gallatin  Bank  formed  a 


1  John  Moody,  The  Truth  about  the  Trusts,  453-67. 

2  Mr.  W.  R.  L,awson  declares  :  "  The  colossal  gambles  which  follow 
each  other  so  rapidly  in  Wall  Street  and  in  the    '  grain-pit '   must 
shake  confidence  in   the   whole  commercial  system  which  permits 
them." — American  Industrial  Problems ',  216. 

a  New  York  Bankers'  Magazine ',  June,  1901,  L,XL,  918. 


710          HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

pool  to  lend  $20,000,000  in  the  market.  But  it  was  a  storm 
which  soon  passed.  The  buyers  of  the  cornered  stook  ac- 
cepted a  moderate  settlement  by  the  "shorts,"  prices  of 
securities  promptly  recovered,  and  the  day  after  the  panic 
money  was  loaned  again  as  low  as  three  per  cent. 

Speculation  raged  violently  through  the  year  1902,  but 
received  a  serious  check  in  1903.  Prices  of  securities,  both 
railway  and  industrial,  had  reached  a  height  which  repelled 
the  public  and  imposed  caution  upon  the  banks.  In  Febru- 
ary, 1903,  began  the  decline  in  the  price  of  pig  iron,  which 
was  not  checked  until,  from  $24.25  per  ton,  it  had  fallen  by 
successive  stages  to  $15.50  in  November.1  Inevitably,  the 
profits  of  the  Steel  Corporation  declined,  the  price  of  its 
common  stock  fell  from  39^  to  10,  and  of  the  preferred 
shares  from  89^  to  49^,  and  in  the  autumn  it  became 
necessary  to  suspend  the  dividend  on  the  common  stock. 
Other  industrial  shares  suffered  in  like  proportion,  and  at 
times  during  the  summer  of  1903  grave  results  were  feared 
for  the  entire  economic  order.  The  fall  in  quotations  for 
iron  was  due  in  large  measure  to  the  restriction  of  orders 
from  the  railways,  which  were  influenced  primarily  not  by 
the  decline  of  business,  but  by  the  scarcity  of  capital.  When 
it  was  found  that  bonds  issued  at  low  rates  for  long  terms  of 
years  could  not  be  sold  to  advantage,  recourse  was  had  in 
many  cases  to  notes,  running  for  only  two  or  three  years, 
and  paying  over  these  short  periods  a  much  higher  rate  of 
interest  than  bonds.3  A  large  volume  of  new  securities, 
however,  was  still  undistributed  in  the  hands  of  rich  men  and 
powerful  syndicates,  and  their  heavy  losses  led  to  the  desig- 
nation of  the  long  period  of  liquidation  as  "  the  rich  man's 
panic."  By  skilful  support  of  the  market,  so  that  the  decline 
in  prices  was  spread  over  several  months,  the  worst  conse- 
quences of  the  crisis  were  averted.  The  industrial  depression 
proved  only  temporary,  and  by  the  summer  of  1904  specula- 

1  Raffalovich,  Le  Marche.  Financier  en  1903-04,  770. 

9  The  sum  of  $129,600,000  was  outstanding  in  railway  notes  in 
April,  1904,  all  issued  since  July  I,  1903,  and  paying  from  5  to  6  per 
cent,  interest,— New  York  Evening  Post,  April  23,  1904. 


THE   CRISIS  OF  /po/.  71  1 


tion  for  the  rise  was  resumed,  and  continued,  with  varying 
fortunes,  until  the  latter  part  of  1906. 

The  year  1907  opened  with  a  feeling  among  far-sighted 
bankers  that  speculation  had  been  carried  to  extremes  and 
that  the  only  safe  policy  to  pursue  during  the  year  was  one 
of  conservatism.  These  feelings  were  justified  in  March  by 
a  sudden  collapse  in  the  stock  market  —  one  of  the  most 
violent  and,  in  some  respects,  most  peculiar  ever  experienced. 
With  little  previous  warning  and  without  any  notable  event 
to  bring  about  the  crash,  buying  power  suddenly  disap- 
peared from  the  market  about  the  i3th  of  March  and,  after 
serious  losses  on  that  day,  prices  of  leading  stocks  plunged 
downward  many  points  on  the  i4th.  Reading,  which 
opened  at  115,  closed  at  93  ;  Amalgamated  Copper  fell  from 
98  to  80;  American  Smelting  from  130^  to  no,  and  Union 
Pacific  from  145  to  120^.  L,ossesin  many  other  cases  were 
20  per  cent.,  and  in  some  cases  much  more.  Issues  which 
were  not  of  a  first-class  and  well-known  character  became 
almost  unsalable.  Margins  were  wiped  out,  stocks  were 
thrown  over  without  regard  to  price,  and  heavy  losses  were 
suffered  by  wealthy  men  who  had  been  induced  to  buy 
Union  Pacific  and  other  stocks  in  the  expectation  of  an 
advance.  l  Paper  profits  shrivelled  up  more  rapidly  than  in 
the  great  market  breaks  of  "  Black  Friday  "  in  1869  or  of 
the  panic  of  1873. 

Events  during  the  early  summer  were  not  encouraging  to 
the  market.  The  government  prosecutions  of  corporations 
culminated  in  the  fine  of  $29,240,000  imposed  upon  the 
Standard  Oil  Company  of  Indiana,  upon  1462  counts,  for 
rebating.  The  scarcity  of  capital  was  indicated  by  the 
complete  failure  of  bond  offerings  by  leading  cities  whose 
credit  was  above  reproach.  On  August  9th,  an  offer  by  the 
city  of  Boston  of  $4,000,000  in  4  per  cent,  bonds  brought 
bids  for  only  $200,000.  Three  days  later  an  offer  by  the 
city  of  New  York  of  $15,000,000  4  per  cents,  brought  bids  of 


1  The  shrinkage  in  26  principal  stocks  alone,  as  compared  with 
January  i,  1907,  was  computed  at  $971,500,000. — New  York  Times, 
March  15,  1907,  2, 


712          HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

only  $2,713,815  at  par.1  The  market  recovered  slowly  and 
fitfully  for  a  time,  but  suffered  another  downward  move- 
ment in  July  and  August,  which  carried  prices  in  some  cases 
below  the  level  of  March.  Kven  after  these  events,  however, 
although  it  was  known  that  many  individuals  had  suffered 
seriously  and  that  loans  had  been  called  in  large  amounts  by 
the  banks,  there  was  no  important  bank  failure  and  no  indi- 
cation of  serious  disaster  until  the  middle  of  October. 

As  in  most  panics,  the  crash  came  suddenly  and  at  an 
unexpected  moment.  It  began  through  the  inability  of 
certain  persons  who  were  speculating  in  United  Copper 
stock  to  continue  the  operations  for  a  rise  which  they  had 
been  carrying  on.  A  fall  in  the  price  of  copper  metal  ad- 
versely affected  most  of  the  copper  securities.  Under  the 
misapprehension  that  a  corner  had  been  created  in  United 
Copper,  quotations  were  run  up  in  a  few  days  from  37  to  60. 
All  the  stock  bought  by  the  bull  pool,  with  a  view  of  squeez- 
ing the  bears,  was  delivered  to  them.  The  brokers  found 
themselves  unable  to  pay  for  it,  the  stock  dropped  on  October 
i6th  to  10,  and  it  soon  developed  that  a  chain  of  banking 
institutions  which  was  under  the  control  of  interests  affili- 
ated with  the  copper  speculators  had  become  deeply  involved 
in  their  operations.2  The  result  was  that  several  banking 
institutions — the  Mercantile  National,  the  National  Bank  of 
North  America,  the  New  Amsterdam  National  Bank,  and  a 
few  smaller  ones — appealed  to  the  Clearing-House  Com- 


1  New  York  Banker?  Magazine,  September,  1907,  LXXV.,  436. 

2  Their  methods  were  described  thus  :  "  Mr.  Morse  first,  and  then  the 
Thomases  and  the  Heinzes,  had,  after  securing  one  bank,  hypothecated 
the  stock  of  that  bank  in  various  financial  institutions,  not  only  here 
but  all  over  the  country  ;  had  taken  the  money  obtained  by  a  loan 
on  the  stock  of  one  bank  to  buy  stock  in  another  ;  had  mortgaged 
that  and  bought  into  still  another,  and  so  on  and  on.      ...      Fur- 
thermore, after  securing  control  of  banks,  they  had  made  loans  to 
themselves  for  the  flotation  of  promotion  schemes  and  for  the  conduct 
of  operations  in  the  stock  market." — Lawrence  Dunning,   "In  the 
Days  of  the  Panic,"  in   Van  Norden  Magazine,  December,   1907, 
II.,  43- 


THE  CRISIS  OF  /po/.  713 


tnittee  for  aid  in  meeting  their  adverse  balances   at  the 
Clearing  House. 

These  conditions  afforded  an  opportunity  for  the  more 
conservative  bankers  who  controlled  the  committee  to  accom- 
plish what  they  had  long  desired  —  the  elimination  of  a 
group  of  speculators  from  the  banking  world.  The  latter 
were  notified  that  the  resignations  of  officers  and  directors 
must  be  placed  in  the  hands  of  the  Clearing  House  Com- 
mittee, and  new  officers  appointed,  if  aid  was  to  be  extended. 
There  was  nothing  to  do  but  to  comply  with  this  demand. 
New  officers  were  appointed,  and  the  institutions  were  en- 
abled to  continue  in  business.  On  Monday  night,  October 
2ist,  however,  application  for  aid  was  made  to  the  Clearing- 
House  Committee  by  the  Knickerbocker  Trust  Company, 
the  third  largest  trust  company  in  New  York,  and  having 
deposits  of  nearly  $60,000,000.  It  developed  that  its  assets 
were  to  a  considerable  extent  locked  up  in  enterprises  which 
could  not  be  immediately  liquidated,  and  that  the  president 
had  been  in  close  business  relations  with  the  controlling 
spirits  in  the  National  Bank  of  North  America.  The  Na- 
tional Bank  of  Commerce,  which  attended  to  the  clearings 
of  the  Knickerbocker  Trust  Company,  finding  a  heavy  un- 
settled balance  against  the  company,  refused  to  clear  for  it} 
and,  after  a  run  in  which  about  $8,000,000  were  paid  out, 
the  company,  on  October  22d,  was  compelled  to  suspend. 

The  next  morning  began  a  run  upon  the  Trust  Company 
of  America,  also  having  deposits  of  nearly  $60,000,000, 
which  proved  to  be  the  most  serious  run  ever  made  upon  a 
banking  institution  without  destroying  it.  Within  about 
two  weeks  the  sum  of  $34,000,000  was  paid  in  cash  to 
depositors  and  in  settlement  of  checks  presented  by  other 
banking  institutions.  A  run  also  began  upon  the  Lincoln 
Trust  Company,  which  reduced  its  deposits  within  a  short 
time  from  about  $20,000,000  to  about  $6,000,000.  Inevitably, 
such  events  produced  their  reaction  in  the  stock  market. 
On  Thursday  afternoon,  October  24th,  business  came  almost 
to  a  standstill  for  lack  of  "  call  funds."  President  Thomas, 
of  the  Stock  Exchange,  hurried  over  to  the  office  of  Mr.  J. 


714          HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

Pierpont  Morgan,  at  about  twenty  minutes  past  two,  with 
the  news  that  the  exchange  must  close  if  money  was  not 
forthcoming.  Immediately,  Mr.  Morgan  summoned  the 
presidents  of  the  big  banks,  and  a  fund  of  $25,000,000  was 
pledged  to  prevent  disaster. 

Already  the  cool,  imperturbable  financier  who  in  1895 
had  rescued  the  national  treasury  from  suspension  of  gold 
payments,  and  who  had  made  his  name  a  household  wrord 
by  the  formation  of  the  United  States  Steel  Corporation,  was 
the  recognized  chieftain  in  the  measures  taken  for  averting 
disaster.  Secretary  Cortelyou,  who  had  hurried  to  New 
York  on  the  outbreak  of  the  trouble,  insisted  that  the  finan- 
cial interests  should  be  united,  and  Mr.  Morgan  was  the 
natural  leader.1  The  Secretary  of  the  Treasury  promptly 
began  large  deposits  of  public  funds  in  national  banks, 
which  enabled  these  banks  to  extend  aid  more  generously 
to  the  threatened  trust  companies  than  would  otherwise 
have  been  the  case.  Within  a  few  days  about  $35,000,000 
of  public  money  was  thus  placed  at  the  command  of  the 
market  in  New  York,  and  considerable  deposits  were  made 
at  Chicago,  Pittsburg,  Cincinnati,  and  other  central  points. 
Net  deposits  of  public  funds  held  by  national  banks  were 
ultimately  increased  from  August  22d  to  December  3d  by 
the  sum  of  $79,834,689. 

Under  the  strain  of  panic  and  the  rigidity  of  the  currency 
system,  American  banking  broke  down  as  it  had  done  in 
1857  and  1893.  On  Saturday,  October  26th,  the  New  York 
Clearing  House  Committee  decided  upon  the  issue  of  Clearing 
House  certificates  on  the  following  Monday,  and  on  the 
same  day  payment  of  checks  in  currency  was  generally  sus- 
pended at  the  New  York  banks,  and  the  same  policy  spread 
rapidly  throughout  the  country.  Clearing  House  certificates 
were  issued  directly  by  Clearing  House  committees  in  lead- 
ing cities.  The  amounts  issued  at  the  principal  cities  were  : 
New  York,  $100,000,000 ;  Chicago,  $37,505,000 ;  Phila- 
delphia, $13,295,000;  Boston,  $11,995,000  ;  St.  I/)uis,  $12,- 

1  Cf.  James  Creelman,  "Morgan  the  Magnificent,"  in  Pearson's 
Magazine,  February,  1908,  XIX.,  132, 


THE   CRISIS  OF  IQO?.  715 

965,000;  Pittsburg,  $5,855,000;  Baltimore,  $2,520,000; 
Milwaukee,  $3,260,000.  In  Pittsburg  and  many  other  places, 
certificates  or  checks  of  small  denominations  were  issued  for 
general  circulation.  In  Pittsburg  the  Stock  Exchange  also 
was  closed,  and  in  several  Western  States  bank  holidays 
were  declared  by  the  governors. 

Notwithstanding  these  measures,  alarm  was  not  allayed 
and  deposits  in  many  banks  and  trust  companies  in  New 
York  continued  to  be  withdrawn  and  hoarded  in  currency. 
The  refusal  of  the  banks  to  pay  currency  for  checks  caused 
a  so-called  "  premium  on  currency,"  which  rose  as  high  as 
4^  per  cent.,  and  was  for  a  considerable  time  at  3  per  cent. 
It  was  estimated  that  during  October  and  November  not 
much  less  thati  $25,000,000  in  currency  was  sold  by  brokers 
in  the  financial  district  for  checks.1  Almost  immediately, 
also,  the  New  York  banks  began  to  feel  the  strain  of  the 
demand  from  their  correspondents  in  the  interior  for  the 
return  of  their  reserve  deposits.  It  was  calculated  that  from 
the  beginning  of  the  panic  to  the  close  of  December  about 
$296,000,000  in  currency  was  absorbed  throughout  the  coun- 
try, and  that  of  this  sum  $218,000,000  passed  through  the 
New  York  banks. 

Foreign  exchange,  fluctuating  uncertainly  at  first  because 
of  the  disposition  in  Europe  to  sell  and  remit  American 
securities,  turned  sharply  in  favor  of  gold  imports,  and 
before  the  end  of  October  engagements  of  over  $24,000,000 
were  announced,  which  were  swelled  during  November  and 
December  to  an  aggregate  of  more  than  $100,000,000.' 
While  $94,000,000  of  this  gold  was  imported  at  New  York, 


1  A.  D.  Noyes,  '*  The  Financial  Panic,"  in  The  Forum,  Jan.-March, 
1908,  XXXIX.,  302. 

2  The  "premium  on  currency"  made  it  profitable  to  import  gold 
with  exchange,  in  bank  checks,  far  above  the  usual  gold  export  point. 
While  the  normal  gold  import  point  is  $4.83^,  a  premium  of  three 
cents  on  the  dollar  would  permit  importations  without  loss  at  a  rate 
nearly  15  cents  higher.     The  rate  promptly  advanced  from  $4.80  as 
high  as   $4.91,  without  checking  gold  imports.      Vide  Noyes,   TKt 
Forum,  Jan.-March,  1908,  XXXIX.,  308, 


716          HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

it  was  filtered  through  the  New  York  banks  so  quickly  into 
other  parts  of  the  country  and  into  private  hoards  that  the 
cash  holdings  of  the  national  banks  showed  a  loss  of  about 
$42,000,000,  and  State  banks  and  trust  companies  showed  a 
net  loss  of  $19,000,000.  The  New  York  Clearing  House 
banks  shipped  to  the  interior,  from  October  19  to  December 
7,  $106,921,700  in  excess  of  their  receipts  of  currency  during 
the  same  period.1 

The  heavy  demands  for  gold  converged  chiefly  upon 
I/)ndon  and  caused  the  Bank  of  England  to  advance  its  dis- 
count rate  three  times  within  eight  days — from  4^  to  5^2  per 
cent,  on  October  31  ;  to  6  per  cent,  on  Ixovember  4,  and 
to  7  per  cent,  on  November  7,  the  highest  rate  fixed  at  the 
bank  since  1873.  In  Germany  the  bank  rate  was  advanced, 
first,  on  October  29,  from  5^  per  cent,  to  6^  percent.,  and 
on  November  8  to  7^  per  cent.  The  Bank  of  France,  also, 
in  spite  of  its  immense  holdings  of  gold,  advanced  its  rate  to 
4  per  cent,  and  extended  relief  to  the  London  market  by 
discounting  a  quantity  of  short-term  treasury  bills. 

For  a  moment  there  was  serious  talk  of  a  direct  arrange- 
ment with  the  Bank  of  France  to  send  gold  to  New  York. 
It  was  recalled  that  the  French  bank  had  repeatedly  aided 
the  London  market  in  emergencies,  advancing  in  the  Baring 
crisis  of  1890  as  much  as  $15,000,000  to  the  Bank  of  England. 
But  the  French  bank,  when  approached  in  behalf  of  America, 
responded  that,  as  there  was  no  central  institution  in  America 
like  the  Bank  of  England,  it  was  disposed  to  deal  only  with 
the  American  Treasury.  This  the  American  government 
found  inadmissible,  and  the  project  fell  through ;  but  the 
French  bank  parted  with  nearly  $16,000,000  in  American 
eagles  upon  the  security  of  French  commercial  paper.8 

While  pressure  upon  the  banks  was  at  its  maximum,  ex- 
change between  different  cities  became  difficult  by  reason  of 


1  Response  of  the  Secretary  of  the  Treasury  to  Senate  Resolution 
of  December  12,  1907,  Senate  Document  208,  6oth  Congress,  ist 
Session,  15. 

9  Yves  Guyot,  La  Crise  Americaine,  in  Revue  de  Commerce  de 
V Industrie  et  de  la  Banque>  December  31,  1907. 


THE  CRISIS  OF  If/Of. 


717 


the  suspension  of  currency  payments,  and  even  the  market 
for  foreign  exchange  was  temporarily  blocked.  Almost 
immediately,  however,  came  into  play  the  well-established 
economic  principle  that  in  such  emergencies  goods  will  be 
sacrificed  to  obtain  money.  The  change  in  the  character  of 
the  foreign  trade  of  the  country  within  the  short  period  of 
five  months  presented  an  instructive  revolution.  A  volume 
of  imports  which,  in  connection  with  foreign  freights,  in- 
creased the  obligations  of  the  country  abroad,  was  suddenly 
turned  into  a  balance  of  two  to  one  in  favor  of  exports  by 
expediting  the  movement  of  the  crops  to  Europe  and  by  the 
curtailment  of  imports.  The  actual  figures  of  the  merchan- 
dise movement  in  these  five  months  afford  so  striking  an 
illustration  of  the  tendencies  of  the  market  in  time  of  panic 
that  it  is  worth  while  to  reproduce  them  : 

Foreign  trade  movement,  August  /,  to  December  j/,  1907. 


Month. 

Imports  of 
merchandise. 

Exports  of 
merchandise. 

Excess  of 
exports. 

August. 

$    12^  806  O41 

$127,270,447 

$i  464  404 

September  

106,365,180 

115,118,142 

28,051  162 

October  

111,912,621 

180,256,085 

68,141,464 

November  . 

IIO  Q42  Ql6 

2O4  4.74  217 

Ql  511  1OI 

December.  . 

02.288.771 

207.I7Q.4l6 

II4.800.665 

Commercial  conditions  naturally  reflected  the  strain  in  the 
money  market.  The  crisis  came  too  late  in  the  year  to 
pull  down  greatly  the  average  of  business  movements,  but 
in  the  last  ten  weeks  of  1907  stock  market  prices  fell  sharply, 
clearings  decreased,  dividends  were  passed  or  reduced  in 
many  cases,  and  failures  of  large  corporations  and  private 
firms  became  frequent.  The  shrinkage  in  the  market  value 
of  stock  exchange  securities  alone  was  estimated  as  high  as 
$5,000,000,000.  *  Exchanges  through  the  clearing  houses 


1  New  York  World,  December  29,  1907.  Computed  shrinkage  on 
leading  stocks  as  compared  with  December  31,  1906,  was  $2, 609, 55 2,- 
825.  Losses  on  bonds  were  estimated  at  11,000,000,000  and  on  mining 
and  unlisted  stocks  nearly  $1,500,000,000. 


7l8        HISTORY  OP  MODERN  BANKS  OF  ISSUE. 


showed  a  marked  decline  from  the  moment  of  the  outbreak 
of  the  panic.  By  December  the  total  for  all  cities  reporting 
was  the  smallest  of  any  month  since  September,  1904,  and 
reflected  a  decline  of  34  per  cent,  from  December,  1906,  35 
per  cent,  from  December,  1905,  and  26  per  cent,  from  1904. 
For  the  calendar  year  clearings  at  New  York  fell  from  $104- 
675,828.656  in  1906  to  $87,182,168,381  in  1907. '  The  total 
of  liabilities  of  insolvent  enterprises  was  swelled  by  a  few 
important  suspensions,  like  those  of  the  Knickerbocker 
Trust  Company,  the  Pope  Manufacturing  Company,  the 
Westinghouse  Company,  and  the  Arnold  Print  Works,  until 
the  total  was  three  times  that  of  1906.  About  seventy  bank- 
ing institutions  went  down  in  the  last  three  months  of  the 
year,  but  some  were  of  small  importance,  and  the  number 
of  national  bank  suspensions  did  not  compare  with  the 
dismal  record  of  1893.  Commercial  failures  of  all  classes 
for  a  series  of  years  were  as  follows  : 

COMMERCIAL  FAILURES,  1898-1907. 


1898 
1899 
1900 
1901 
1902 
1903 
1904 

1905 
1906 
1907 


For  the  first  two  months  of  1908  the  number  of  failures 
was  3013  and  liabilities  were  $91,252,443, — an  increase  of  60 
per  cent,  in  number  and  about  200  per  cent,  in  amount  over 
1907. 

In  order  to  demonstrate  the  determination  of  the  govern- 
ment to  exercise  its  powers  fully  to  avert  disaster,  the 
Secretary  of  the  Treasury  took  another  important  step.  His 


Per  cent. 

No.  in  business. 

No.  failing. 

Liabilities. 

of  assets. 

,093,000 

11,638 

1141,137,115 

52.1 

,125,000 

9,634 

119,730,593 

51.8 

,161,000 

9,913 

127,184,705 

47-2 

,207,898 

10,657 

129,978,838 

46.9 

,238,973 

9.971 

105,693,623 

48.0 

,273,000 

29,768 

154,277,093 

54-5 

,308,000 

10,422 

143,300,845 

53-i 

,352,947 

9,970 

121,770,668 

53-5 

,401,985 

9,384 

123,827,957 

49-9 

,447,680 

10,285 

371,342,692 

72.5 

BradstreePs,  January  4,  1908,  XXXVI.,  3. 


THE  CRISIS  OF  igoj.  fig 

deposits  of  public  funds  in  the  banks  had  been  so  large  that 
it  was  not  possible  to  continue  further  this  form  of  relief  to 
the  market.  '  Accordingly,  in  order  to  draw  out  more  funds 
from  hoards,  and  make  it  possible  to  increase  bank-note 
circulation,  Secretary  Cortelyou  announced  on  Sunday, 
November  18,  that  he  would  receive  subscriptions  for  $50,- 
000,000  in  two  per  cent,  bonds  for  the  construction  of  the 
Panama  Canal  and  for  $100,000,000  in  three  per  cent.  Treas- 
ury certificates  running  for  one  year.  These  measures  were 
* '  influenced  by  the  conclusion  that  it  was  advisable  to  take 
some  strong  and  resolute  step  which  would  convince  the 
public,  both  at  home  and  abroad,  that  the  government  was 
thoroughly  alive  to  the  situation  and  determined  to  give  its 
aid  in  every  possible  legal  and  proper  form."  3 

It  was  not  intended  to  accept  bids  for  the  full  amount  of 
these  issues,  if  they  were  not  found  necessary,  and  eventu- 
ally allotments  were  made  of  only  $24,631,980  in  the  Pan- 
ama bonds  and  $15,436,500  in  the  certificates  of  indebtedness. 
One  of  the  purposes  of  the  issues  of  new  securities  was  to 
stimulate  increase  in  bank-note  circulation..  As  the  re- 
sult of  this  and  other  measures  taken  by  Secretary  Cortelyou, 
including  more  liberal  rules  for  the  acceptance  of  bonds  to 
secure  deposits,  bank-note  circulation  advanced  from  $607,- 
118,742  on  October  15,  1907,  to  $631,344,943  on  November 
15,  $676,914,235  on  December  15,  and  $695,927,806  on  Jan- 
uary 1 8,  1908.  These  figures  indicate  that,  in  spite  of  the 
encouragement  given  by  special  measures,  the  inelastic  char- 


1  In  response  to  the  criticism  that  he  had  no  right  to  issue  securi- 
ties to  obtain  funds  when  he  had  large  deposits  in  banks,  the  Secre- 
tary stated  that  "  while  the  entire  economic  resources  of  the  country 
were  being  devoted  to  the  relief  of  the  monetary  stringency,  not  only 
on  the  part  of  domestic  bankers,  but  by  foreign-exchange  houses  and 
by  the  railways  in  the  prompt  movement  of  freight  for  export,  it 
seemed  inadvisable  for  the  Secretary  of  the  Treasury  to  take  any  step 
which  would  tend  to  counteract  these  efforts  by  withdrawing  funds 
from  the  banks  and  thereby  adding  to  the  evils  which  it  was  his 
earnest  desire  to  alleviate  and  bring  to  an  end." — Senate  Document 
208,  6oth  Congress,  ist  Session,  19. 

3  Senate  Document  208,  6oth  Congress,  ist  Session,  17. 


720        HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

acter  of  the  bank-note  system  delayed  the  larger  part  of  the 
increase  until  after  the  need  for  the  new  notes  had  ceased. 

The  effect  of  these  various  measures  of  relief  was  soon 
felt  in  the  cessation  of  hoarding,  the  decline  of  the  premium 
on  currency,  and  the  increase  in  the  cash  reserves  of  the 
New  York  Clearing  House  banks,  which  had  been  subjected 
to  intense  strain  at  the  height  of  the  panic.  The  deficit  in 
reserves,  which  stood  for  the  week  ending  November  2  at 
$38,838,825,  had  been  further  swelled  on  November  9  to 
$ 53, 666,950 ;  but  the  increase  in  the  next  week,  following  the 
action  of  the  Treasury,  was  less  than  $500,000,  and  in  the 
following  weeks  turned  rapidly  downward,  until  on  Decem- 
ber 28,  1907,  the  amount  had  been  reduced  to  $20,170,350. 
The  next  few  weeks  saw  the  extinction  of  the  deficit  and 
the  rapid  accumulation  of  cash  which  usually  follows  a  panic, 
until  reserves  stood  on  February  i,  1908,  at  $325,152,100  in 
amount  and  $40,526,725  in  excess  of  legal  requirements. 

By  the  latter  part  of  November  the  worst  of  the  panic 
was  over,  so  far  as  the  money  market  was  concerned.  Pay- 
ments in  currency  were  gradually  resumed,  the  Secretary  of 
the  Treasury  was  able  to  withdraw  a  certain  amount  of  pub- 
lic moneys  from  the  banks,  and  further  engagements  of  gold 
were  suspended.  In  Europe  also  conditions  rapidly  changed, 
so  that  the  directors  of  the  Bank  of  England  during  Jan- 
uary reduced  the  discount  rate  by  successive  steps  from  seven 
per  cent,  to  four  per  cent.  The  gold  stock  of  the  bank, 
which  had  fallen  on  November  7  to  ^27,725,225,  rose  by 
January  30,  1908,  to  ,£38,508,150.  The  Bank  of  Germany 
felt  the  benefit  of  the  inflow  of  cash  after  the  turn  of  the 
year  and  was  able  to  reduce  its  discount  rate,  first  from  seven 
and  a  half  per  cent,  to  six  and  a  half  per  cent.,  and  on  Jan- 
uary 25,  1908,  to  six  per  cent.  Within  about  two  weeks — 
from  December  31,  1907,  to  January  17,  1908— its  metallic 
reserve  increased  by  $32,000,000  and  its  notes  outstanding 
decreased  by  $82,000,000. 

The  remainder  of  the  year  1908  repeated  the  history  of 
previous  periods  of  liquidation.  Money  continued  to  accumu- 
late in  the  banks,  rates  for  loans  on  call  fell  to  a  minimum, 


THE   CRISIS  OF  Jpo;.  721 


and  speculation  found  encouragement  in  these  conditions. 
After  the  election  of  William  H.  Taft  as  President  in  the 
United  States  securities  advanced  to  prices  only  slightly 
below  the  maxima  of  1906  and  1907.  The  maximum  cash 
holdings  of  the  New  York  Clearing  House  banks  were  "at- 
tained on  August  29,  1908,  when  the  amount  was  $414,  013,  300, 
but  an  amount  only  about  $30,000,000  less  had  been  reached 
as  early  as  the  middle  of  May.  Even  the  autumn  crop 
movement  failed  to  reduce  materially  this  mass  of  gold  and 
legal-tender  notes,  although  the  surplus  above  legal  require- 
ments was  gradually  reduced  by  the  expansion  of  loans,  from 
$66,098,800  on  June  2yth  to  $28,130,650  on  November  28th. 
In  Europe  comparison  of  metallic  reserves  in  November  with 
those  of  the  panic  period  showed  increases  at  the  Bank  of 
England  from  ^31,  896,291  on  November  13,  1907,  to  ^"35,- 
719,196  ($174,100,000)  on  November  n,  1908;  at  the  Bank 
of  France  (gold  only)  from  2,709,200,000  francs  ($523,000,000) 
on  November  21,  1907,  to  3,  354,  300,000  francs  ($647,400,000) 
on  November  19,  1908  ;  and  at  the  Imperial  Bank  of  Germany 
from  729,  805,  ooo  marks  ($i  73,  330,000)  on  November  14,  1907, 
to  i,  093,  094,000  marks  ($259,600,000)  on  November  14,  1908. 
In  all  leading  commercial  countries  developed  a  degree  of 
reviving  industrial  activity  which  indicated  that  the  effects 
of  the  crisis  of  1907  were  less  far-reaching  than  previous  ones, 
and  tended  to  establish  the  principle  that  the  capital  invested 
in  the  machinery  of  the  processes  of  current  production  had 
come  to  constitute  a  permanent  fund  of  wealth,  in  comparison 
with  which  the  amount  affected  or  impaired  by  a  single 
financial  disturbance  was  becoming  a  steadily  diminishing 
ratio. 
46 


CHAPTER  XXVI. 

THE  FEDERAL  RESERVE  ACT. 

Banking  Policy  of  the  Administration  of  President  Wilson — Pro- 
vision for  Local  Regional  Banks  Knit  together  by  a  Government 
Board — Rediscount  of  Local  Paper  by  the  Regional  Banks — 
Issue  of  Notes  by  the  Government  on  Application  by  the  Banks — 
Gradual  Retirement  of  the  Two-Per-Cent.  Bonds — Acceptances 
and  Branch  Banking  Abroad. 

ANEW  turn  was  given  to  the  discussion  of  currency 
legislation  in  the  United  States  by  the  choice  in  the 
elections  of  1912  of  a  Democratic  President  and  a 
Congress  Democratic  in  both  branches.  The  necessity  of 
currency  reform  was  recognized  in  the  Democratic  national 
platform,  adopted  at  Baltimore  on  July  2,  1912,  but  it  was 
declared  that  ( '  We  oppose  the  so-called  Aldrich  bill  or  the 
establishment  of  a  central  bank;"  Upon  the  meeting  of  the 
short  session  of  the  62d  Congress,  in  December  following 
the  election,  consideration  of  monetary  legislation  was  begun 
by  a  subcommittee  of  the  House  Committee  on  Banking, 
headed  by  Representative  Carter  Glass  of  Virginia,  who  was 
already  indicated  as  the  Chairman  of  the  Banking  Committee 
in  the  new  Congress  which  was  to  enter  upon  its  functions 
on  March  4,  1913. 

It  was  generally  recognized  that,  in  view  of  the  declara- 
tion of  the  successful  party  in  its  national  platform,  it  was 
necessary  to  find  a  formula  which  would  afford  the  advantages 
of  a  certain  degree  of  concentration  of  reserves  and  greater 

722 


THE  FEDERAL  RESERVE  ACT.  723 

elasticity  in  note  issue  in  some  other  way  than  through  a 
single  bank  of  issue.  The  solution  arrived  at,  after  several 
months  of  consideration  in  committees  and  discussion  in 
Congress,  was  embodied  in  the  law  approved  December  23, 
1913,  known  as  the  Federal  Reserve  Act.  The  first  draft  of 
this  measure  was  made  public  in  June,  but  the  bill  was  not 
taken  up  in  the  House  until  after  consideration  by  a  Demo- 
cratic caucus,  which  made  a  number  of  important  changes, 
and  only  passed  the  House  on  September  i8th. 

Vigorous  protests  against  certain  features  of  the  measure 
were  made  by  a  convention  of  state  bankers  at  Chicago  held 
on  August  22d  and  23d,  and  by  the  regular  annual  con- 
vention of  the  American  Bankers'  Association  at  Boston  in 
October.  The  result  of  these  and  other  criticisms  was  a 
series  of  hearings  given  by  the  Senate  Committee  to  repre- 
sentatives of  the  bankers'  organizations  and  to  students  of 
the  subject,  which  resulted  in  important  changes  by  the 
Senate  Committee  and  by  a  caucus  of  Democratic  senators. 
The  bill  passed  the  Senate  on  December  i8th.  In  the  mean- 
time repeated  conferences  between  Senator  Owen,  Chairman 
of  the  Senate  Committee,  Chairman  Glass  of  the  House 
Committee,  William  G.  McAdoo,  Secretary  of  the  Treasury, 
and  others  interested,  had  reconciled  many  differences  be- 
tween the  two  Houses,  and  the  conference  report  was 
agreed  to  with  such  promptness  that  the  bill  was  laid  be- 
fore President  Wilson  and  signed  by  him  two  days  before 
Christmas. 

The  Federal  Reserve  Act  was  designed  to  meet  these  three 
serious  defects  of  the  national  banking  system : 

1.  Lack  of  concentration  of  banking  reserves. 

2.  I^ack  of  elasticity  in  the  system  of  note  issue. 

3.  Absence  of  adequate  facilities  for  expanding  credit  in 
periods  of  pressure  through  the  system  of  rediscounts  generally 
employed  at  European  banks  of  issue. 

The  method  of  concentrating  reserves  adopted  by  the  new 
law  was  the  creation  of  several  federal  reserve  banks,  finally 
fixed  in  the  act  at  not  less  than  eight  in  number  nor 
more  than  twelve.  It.  was  the  earnest  contention  of  those 


724 


HISTORY  OF  MODERN  BANKS  OF  ISSUE. 


who  favored  a  higher  degree  of  concentration  that  the  num- 
ber of  reserve  banks  should  be  limited  to  four  or  five,  and 
four  was  fixed  at  one  time  by  majority  vote  of  the  Senate 
Committee  on  Banking.  The  original  House  bill  provided 
for  not  less  than  twelve  such  districts,  and  this  was  the 
number  finally  established. 

Wide  powers  were  given  by  the  new  law  to  the  federal 
reserve  banks  and  to  the  Federal  Reserve  Board,  which  was 
constituted  to  bind  the  various  parts  of  the  new  system 
together.  It  was  provided  that  the  capital  of  the  federal 
reserve  banks  should  be  obtained  by  the  subscription  by  each 
national  bank  of  an  amount  equal  to  six  per  cent,  of  its  com- 
bined capital  and  surplus.  Of  this  amount  three  per  cent. 
was  to  be  paid  up  within  a  short  time,  leaving  it  to  the 
discretion  of  the  Federal  Reserve  Board  to  call  for  the  re- 
maining three  per  cent,  at  such  later  date  as  it  might  see  fit. 
The  amount  of  subscribed  capital  contemplated  by  this  pro- 
vision, if  all  the  national  banks  entered  the  system,  was 
about  $107,000,000.  These  figures,  however,  were  exclusive 
of  the  capital  of  the  state  banks  and  trust  companies,  which 
were  authorized  under  certain  conditions  to  become  members 
of  the  new  system. 

In  the  case  of  national  banks,  something  approaching 
compulsion  was  put  upon  them  to  enter  promptly  the  new 
federal  reserve  system,  by  the  provisions  that  their  franchises 
as  national  banks  should  be  forfeited  unless  they  accepted 
the  new  act  within  one  year  after  its  passage  ;  that  banks  in 
reserve  cities  might,  in  the  discretion  of  the  Federal  Reserve 
Board,  be  deprived  of  the  rights  of  reserve  agents  within 
sixty  days  ;  and  that  only  banks  members  of  the  system 
could  sell  their  two  per  cent,  bonds  to  the  federal  reserve 
banks  under  the  refunding  provisions  of  the  law.  In  the 
case  of  state  banks  and  trust  companies,  no  such  compul- 
sion was  applied,  but  the  privileges  of  rediscount  and  other 
advantages  of  the  new  system  were  extended  to  those  of 
adequate  capital  whenever  they  were  admitted  to  the  new 
system. 

The  management  of  each  federal  reserve  bank  is  vested 


THE  FEDERAL  RESERVE  ACT. 


725 


in  a  board  of  directors  of  nine  members,  of  whom  three  are 
chosen  directly  by  member  banks  from  their  own  ranks, 
three  are  chosen  by  member  banks  from  outsiders  actively 
engaged  in  commerce,  agriculture,  or  some  other  industrial 
pursuit,  and  three  are  appointed  by  the  Federal  Reserve 
Board.  One  of  the  latter  is  designated  as  chairman  of  the 
local  board  and  has  the  custody  of  the  commercial  paper  and 
other  securities  presented  by  the  bank  as  the  basis  of  note 
issue. 

The  federal  reserve  banks  are  authorized  to  receive  de- 
posits only  from  member  banks  and  from  the  Federal 
Government,  making  them  essentially  bankers'  banks  and 
excluding  them  from  competing  with  existing  banks  for  the 
deposits  of  individuals  and  corporations.  They  are  permitted, 
however,  to  enter  the  open  market  for  the  purpose  of  dealing 
in  bills  of  exchange,  cable  transfers,  and  acceptances,  and 
doing  various  other  classes  of  business. 

The  district  banks  are  knit  together  by  the  Federal  Re- 
serve Board,  which  was  finally  fixed  at  seven  members,  of 
whom  the  Secretary  of  the  Treasury  and  the  Comptroller  of 
the  Currency  serve  ex  officio.  The  term  of  the  five  remaining 
members  is  fixed  at  ten  years  each,  after  the  first  appoint- 
ments are  so  adjusted  as  to  provide  for  the  expiration  of  one 
of  the  regular  terms  at  the  end  of  each  two  years.  Wide 
powers  are  given  by  the  law  to  the  Federal  Reserve  Board, 
both  in  prescribing  regulations  for  the  member  banks  of 
the  system,  in  determining  the  rate  of  discount  and  the 
general  policy  of  the  federal  reserve  banks,  and  in  com- 
bining the  resources  of  these  reserve  banks  through  com- 
pulsory rediscounts  and  transfers  of  funds.  Among  the 
powers  specifically  granted  to  the  Federal  Reserve  Board 
are  the  following : 

To  examine  the  books  of  each  federal  reserve  bank  and 
each  member  bank  and  to  make  a  weekly  statement  of  condi- 
tion of  each  federal  reserve  bank  and  a  consolidated  statement 
for  all  such  banks. 

To  permit  (or,  by  the  affirmative  vote  of  at  least  five 
members  of  the  Reserve  Board,  to  require)  federal  reserve 


726          HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

banks  to  rediscount  the  discounted  paper  of  other  federal 
reserve  banks,  at  rates  of  interest  to  be  fixed  by  the  Federal 
Reserve  Board. 

To  suspend  for  not  exceeding  thirty  days,  and  from  time 
to  time  to  renew  such  suspension  for  periods  not  exceeding 
fifteen  days,  any  reserve  requirement  specified  by  the  act. 

To  supervise  the  issue  and  retirement  of  federal  reserve 
notes,  provided  for  by  the  act. 

To  reclassify  reserve  and  central  reserve  cities. 

To  suspend  or  remove  any  officer  or  director  of  any  federal 
reserve  bank,  the  cause  of  such  removal  to  be  communicated 
in  writing  to  the  removed  officer  or  director. 

To  suspend  the  operations  of  any  federal  reserve  bank,  to 
take  possession  thereof,  to  administer  the  same  during  the 
period  of  suspension,  and  to  liquidate  or  reorganize  such 
bank. 

To  grant  to  national  banks  applying  therefor,  when  not  in 
contravention  of  state  or  local  law,  the  right  to  act  as  trustee, 
executor,  administrator,  or  registrar  of  stocks  and  bonds 
under  such  rules  and  regulations  as  the  Federal  Reserve 
Board  may  prescribe. 

These  specified  powers  are  supplemented  by  many  implied 
powers  granted  in  other  portions  of  the  act,  especially  in 
regard  to  the  issue  of  notes  and  control  of  reserves.  Strong 
opposition  was  made  to  the  exercise  of  such  sweeping  powers 
by  a  body  deriving  its  authority  purel)r  from  political  sources 
and  removed  from  direct  contact  with  practical  banking. 
This  was  met  by  the  introduction  of  a  provision,  even  before 
the  bill  was  reported  to  the  House,  authorizing  the  directors 
of  each  federal  reserve  bank  to  appoint  one  member  of  a 
body  to  be  called  the  Federal  Advisory  Council,  which  should 
meet  in  Washington  to  advise  with  the  Federal  Reserve 
Board,  call  for  information,  and  make  recommendations  in 
regard  to  discount  rates  and  the  affairs  of  the  new  system.1 

x  This  provision  was  stricken  from  the  draft  prepared  by  the  con- 
ference of  state  bankers'  associations  at  Chicago,  but  was  embodied 
in  the  act  as  passed,  and  authority  was  given  to  the  Advisory  Council 
to  meet  anywhere  and  to  act  "  by  itself  or  through  its  officers." 


THE  FEDERAL  RESERVE  ACT. 


727 


The  overshadowing  feature  of  the  new  plan,  which  com- 
mended it  to  the  banking  community  in  spite  of  their 
objections  to  details,  was  the  means  afforded  by  the  issue  of 
notes  for  the  granting  of  credit  through  the  rediscount  of 
commercial  paper.  It  is  this  feature  which  permits  the 
extension  of  credit  upon  sound  business  assets,  without 
arbitrary  limitations,  and  makes  impossible  a  currency  panic 
such  as  occurred  in  1907,  so  long  as  the  central  banking 
system  is  solvent.  Under  the  provisions  of  the  law  in  this 
respect,  good  commercial  paper  may  be  presented  for  redis- 
count to  a  federal  reserve  bank  by  any  of  its  member  banks; 
and  if  there  is  a  demand  for  currency,  the  rediscount  may 
be  made  in  the  form  of  the  notes  of  the  federal  reserve  bank. 
A  member  bank  is  no  longer  restricted,  therefore,  in  its 
power  to  extend  accommodation  to  its  clients  by  the  limits 
of  its  own  cash  reserves,  but  may  obtain  currency  from  a 
federal  reserve  bank  by  the  process  of  rediscount;  and  a 
federal  reserve  bank  is  restricted  in  its  capacity  to  make 
rediscounts  only  by  its  command  over  a  sufficient  amount 
of  gold  to  meet  the  somewhat  flexible  requirements  of  the 
law  in  respect  to  its  own  reserves. 

The  paper  acceptable  to  the  federal  reserve  banks  for 
rediscount  must  conform  to  European  banking  experience  in 
being  of  short  maturities  and  based  upon  "  actual  com- 
mercial transactions. ' '  Such  paper  is  defined  to  be  ' '  notes, 
drafts,  and  bills  of  exchange  issued  or  drawn  for  agri- 
cultural, industrial,  or  commercial  purposes,  or  the  proceeds 
of  which  have  been  used,  or  are  to  be  used,  for  such  pur- 
poses, the  Federal  Reserve  Board  to  have  the  right  to 
determine  or  define  the  character  of  the  paper  thus  eligible 
for  discount,  within  the  meaning  of  this  act."  Such  paper 
must  have  a  maturity  at  the  time  of  discount  of  not  more 
than  ninety  days,  except  that  agricultural  paper  having  a 
maturity  not  exceeding  six  months  "  may  be  discounted  in 
an  amount  to  be  limited  to  a  percentage  of  the  capital  of  the 
federal  reserve  bank,  to  be  ascertained  and  fixed  by  the 
Federal  Reserve  Board." 

The    provision    is    made    in  regard  to  note  issue  that 


728  .HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

"  federal  reserve  notes,  to  be  issued  at  the  direction  of 
the  Federal  Reserve  Board  for  the  purpose  of  making  ad- 
vances to  federal  reserve  banks  through  the  federal  reserve 
agents,  as  hereinafter  set  forth  and  for  no  other  purpose,  are 
hereby  authorized."  These  notes  are  made,  by  the  lan- 
guage of  the  law,  "  obligations  of  the  United  States,"  and 
are  receivable  by  all  national  and  member  banks  and 
federal  reserve  banks,  and  for  all  taxes,  customs,  and  other 
public  dues. 

The  language  of  this  provision  was  severely  assailed  by 
eminent  bankers  as  committing  the  government  to  the 
policy  of  fiat  money,  by  the  assumption  and  declaration  that 
the  notes  were  in  the  form  of  advances  to  the  banks  and 
were  obligations  of  the  United  States.  While  this  criticism 
was  approved  in  form  by  nearly  all  economists  of  standing, 
it  was  considered  by  many  to  be  of  minor  practical  import- 
ance, because  the  notes  are  issued  only  upon  the  initiative  of 
the  banks,  are  secured  by  commercial  assets,  and  are  re- 
deemed by  the  banks.  Thus,  the  notes  are  in  effect  the 
notes  of  the  banks,  and  their  governmental  character  is  one 
of  form  rather  than  of  substance. x 

Any  federal  reserve  bank  to  which  notes  have  been  issued 
is  required  to  pay  ''such  rate  of  interest  on  said  amount 
as  may  be  established  by  the  Federal  Reserve  Board."  This 
provision  was  originally  intended  to  permit  a  graduated  tax 
upon  the  issue  of  notes,  but  was  superseded  to  some  extent 
by  the  provisions  made  in  the  final  draft  of  the  act  for  a 
definite  ratio  of  reserve  in  gold  or  lawful  money  against 
notes.  The  reserve  thus  required  is  40  per  cent,  of  the 
amount  of  the  notes  outstanding;  but  it  is  provided  that  the 
ratio  may  fall  below  40  per  cent,  when  a  graduated  tax  is 
paid  at  the  rate  of  not  more  than  one  per  cent,  per  annum 
upon  the  amount  of  the  deficiency,  until  the  ratio  falls  to 
32^  per  cent.,  when  the  tax  is  fixed  at  not  less  than  i^ 
per  cent,  per  annum  upon  each  2^  per  cent,  or  fraction 
thereof  of  the  deficiency. 

'See  letter  cf  the  present  writer  in  the  New  York  Evening  Post, 
October  20,  1913. 


THE  FEDERAL  RESERVE  ACT.  729 

The  notes  of  each  reserve  bank  are  required  to  bear  a 
distinctive  letter  and  serial  number,  to  be  assigned  by  the 
Federal  Reserve  Board.  A  reserve  bank  is  prohibited  from 
paying  out  the  notes  of  other  reserve  banks,  but  must 
return  them  promptly  for  redemption,  either  to  the 
issuing  bank  or  to  the  Treasury  of  the  United  States.  The 
Secretary  of  the  Treasury  is  authorized  to  require  the  reserve 
banks  to  keep  in  the  Treasury  an  amount  of  lawful 
money  sufficient  for  such  redemption,  but  such  deposits 
shall  be  counted  as  a  part  of  the  required  reserve  of  40  per 
cent. 

In  addition  to  the  notes  thus  provided  for,  which  are 
intended  to  give  greater  elasticity  to  the  currency  system, 
the  federal  reserve  banks  are  authorized  to  issue  notes  upon 
United  States  bonds  in  the  manner  provided  by  the  national 
bank  act,  up  to  par  of  the  bonds  deposited.  These  notes  are 
to  be  issued  and  redeemed  under  the  same  terms  and  con- 
ditions as  national  bank  notes,  except  that  the  amount  is 
not  limited  to  the  amount  of  the  capital  stock  of  the  reserve 
bank  by  which  they  are  issued.  This  provision  is  closely 
related  to  the  disposition  made  of  the  two-per-cent.  bonds 
deposited  by  the  banks  under  the  national  banking  law  to 
secure  circulation. 

The  problem  of  a  proper  disposition  of  the  bonds  was  one 
of  the  most  difficult  before  Congress  and  received  its  final 
solution  only  during  the  last  few  days  before  the  enactment 
of  the  law.  The  act  provides  that  national  banks  may  con- 
tinue to  issue  notes  based  upon  bonds,  for  a  period  of  twenty 
years,  but  that  they  may  sell  these  bonds,  to  an  amount  not 
exceeding  $25,000,000  per  year,  to  the  federal  reserve  banks, 
with  the  approval  of  the  Federal  Reserve  Board.  The  bonds 
surrendered  may  be  converted  by  the  federal  reserve  banks 
into  three-per-cent.  bonds  for  thirty  years  or  into  Treasury 
notes  bearing  interest  at  3  per  cent,  and  running  for  one 
year.  The  object  of  the  one-year  notes  is  to  afford  to  the 
federal  reserve  banks  a  form  of  assets  more  readily  negoti- 
able than  long-term  bonds,  for  the  purpose  of  withdrawing 
money  from  the  market  or  borrowing  abroad.  In  this 


730        HISTOR  Y  OF  MODERN  BANKS  OF  ISSUE. 

manner  a  considerable  portion  of  the  bonds  is  likely 
to  be  gradually  absorbed  by  the  federal  reserve  banks, 
without  loading  down  their  own  resources  with  too  large  a 
percentage  of  assets  not  readily  convertible  into  cash  with- 
out loss. 

An  important  departure  made  in  the  new  law  from  the 
provision  of  the  plan  of  the  National  Monetary  Commission 
was  the  taking  away  of  reserve  deposits  from  the  national 
banks.  The  national  banks  were  required  within  three 
years  to  gradually  transfer  to  the  federal  reserve  banks 
such  portions  of  their  reserves  as  they  are  not  required  to 
keep  in  their  own  vaults  in  cash.  In  order  to  avoid 
undue  contraction  during  the  period  of  transferring  these 
funds,  and  to  obviate  the  unnecessary  calling  of  loans, 
the  transition  was  not  only  spread  over  three  years  in  time, 
but  the  percentage  of  reserves  required  was  considerably 
reduced. 

At  the  expiration  of  this  period  of  three  years,  when  the 
new  system  has  come  into  full  operation,  member  banks 
which  are  not  in  reserve  cities  or  central  reserve  cities  will 
be  required  to  hold  reserves  against  demand  deposits  of  only 
12  per  cent.,  in  lieu  of  15  per  cent,  required  under  the  national 
bank  act.  Of  this  amount  4  per  cent,  is  required  to  be  in  cash 
in  the  vaults  of  the  bank,  5  per  cent,  in  the  federal  reserve 
bank  of  the  district,  and  the  remainder  may  be  kept  in  either 
place  at  the  option  of  the  member  bank.  In  the  case  of 
banks  in  reserve  cities,  reserves  are  reduced  from  25  to  15 
per  cent.,  and  must  be  kept  to  the  amount  of  5  per  cent, 
in  their  own  vaults,  6  per  cent,  in  the  federal  reserve 
bank,  and  the  remainder  may  be  kept  in  either  place.  In 
the  case  of  the  central  reserve  cities, — New  York,  Chicago, 
and  St.  Louis,  — the  required  reserve  is  reduced  from  25  per 
cent,  to  1 8  per  cent.,  of  which  6  per  cent,  is  required  to 
be  held  in  the  vaults  of  the  bank,  7  per  cent,  in  the 
federal  reserve  bank,  and  the  remainder  may  be  either  in 
cash  or  in  the  federal  reserve  bank.  A  new  provision  of  law 
permitted  a  classification  of  deposits  and  reduced  the  re- 
quired reserve  against  time  deposits,  payable  on  notice  of 


THE  FEDERAL  RESERVE  ACT. 

thirty  days  or  more,  to  5  per  cent,  of  the  amount  of  such 
deposits,  to  be  distributed  in  like  proportion  with  the  larger 
reserve  required  against  demand  deposits. 

The  system  of  the  Federal  Reserve  Act  bears  a  resemblance 
in  some  respects  to  the  European  systems  of  central  banking, 
where  the  note-issuing  institution  holds  the  principal  gold 
stock  of  the  country  and  protects  it  by  regulation  of  the  rate 
of  discount  and  by  other  measures  tending  to  influence  the 
supply  of  floating  capital.  The  difference  between  the  two 
systems  consists  primarily  in  splitting  up  the  resources  of 
American  banks  into  twelve  divisions,  which  are,  however, 
more  or  less  under  common  control  through  the  Federal 
Reserve  Board.  How  far  this  central  control  will  in  effect 
unify  the  local  banks  into  a  single  powerful  institution  is 
left  to  the  test  of  experience. 

Several  important  modifications  will  take  place  in  Ameri- 
can banking  methods  after  the  new  system  produces  its  full 
effect.  It  is  proposed  by  the  new  law  to  transfer  the  floating 
supply  of  capital  to  the  commercial  rather  than  the  specula- 
tive field  by  excluding  from  the  class  of  securities  eligible  to 
protect  loans  at  federal  reserve  banks  "  notes,  drafts,  or  bills 
covering  merely  investments  or  issued  or  drawn  for  the 
purpose  of  carrying  or  trading  in  stocks,  bonds,  or  other 
investment  securities,  except  bonds  and  notes  of  the  Govern- 
ment of  the  United  States."  Thus,  after  the  new  system 
becomes  effective,  the  element  of  variability  in  the  money 
market  will  be  determined  by  the  rates  of  discount  for 
commercial  paper  rather  than  by  the  rates  for  call  money 
loaned  to  brokers  on  stock-exchange  securities. 

The  manner  of  making  loans  at  American  banks  did  not 
include,  up  to  the  time  of  the  passage  of  the  new  law,  the 
discounting  of  any  considerable  amounts  of  domestic  bills  of 
exchange  or  acceptances.  The  custom  of  manufacturers 
and  wholesale  dealers  in  commodities  was  to  extend  open 
credits  to  their  clients,  which  were  not  represented  by 
negotiable  documents,  and  to  make  their  borrowings  from 
the  banks  upon  paper  bearing  their  own  signature,  known 
as  ' '  single-name ' '  paper.  The  custom  prevailing  in  Euro- 


732  HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

pean  money  markets,  by  which  a  draft  or  bill  of  exchange 
might  be  accepted  and  endorsed  by  a  bank  in  which  the 
drawee  had  a  credit,  and  thereby  made  an  instrument 
readily  negotiable  in  the  open  market,  had  fallen  out  of  use 
in  the  United  States,  and  it  had  been  held  that  a  national 
bank  had  no  authority  under  its  charter  to  give  accep- 
tances. This  disability  was  removed  as  to  foreign  bills  by  a 
provision  of  the  new  law  that  any  member  bank  might 
"accept  drafts  or  bills  of  exchange  drawn  upon  it,  and 
growing  out  of  transactions  involving  the  importation  or 
exportation  of  goods  having  not  more  than  six  months 
sight  to  run."  It  was  also  provided  that  any  federal 
reserve  bank  might  discount  acceptances  based  upon 
the  importation  or  exportation  of  goods  and  which 
should  have  a  maturity  at  time  of  discount  of  not  more 
than  three  months,  when  endorsed  by  at  least  one  member 
bank. 

Another  step  designed  to  facilitate  the  extension  of 
American  banking  abroad  was  the  authority  given  to 
national  banks  having  a  capital  of  $1,000,000  or  more,  to 
establish  branches  in  foreign  countries  or  in  dependencies  of 
the  United  States;  with  the  approval  of  the  Federal  Reserve 
Board,  and  under  such  regulations  as  it  might  prescribe. 
It  was  required  that  the  application  for  authority  to  establish 
such  branches  should  specify  the  amount  of  capital  set  aside 
for  the  conduct  of  foreign  business.  It  was  also  provided 
that  the  federal  reserve  banks  themselves  might,  with  the 
consent  of  the  Federal  Reserve  Board,  open  and  maintain 
banking  accounts  in  foreign  countries,  appoint  correspond- 
ents, and  establish  foreign  agencies,  for  the  purpose  of 
dealing  in  bills  of  exchange.  The  federal  reserve  banks 
were  given  authority  also  to  deal  in  gold  coin  and  bullion 
at  home  and  abroad  and  to  buy  and  sell  at  home  and  abroad 
bonds  of  the  United  States  and  bills,  notes,  revenue  bonds, 
and  warrants  issued  by  state  and  municipal  governments  in 
the  United  States. 

In  the  matter  of  the  rate  of  discount,  each  federal  reserve 
bank  is  permitted  to  establish  its  own  rate  from  time  to  time 


THE   FEDERAL  RESERVE  ACT. 


733 


for  each  class  of  paper,  subject  to  the  review  of  the  Federal 
Reserve  Board.  In  this  respect,  the  uniformity  of  rate 
required  under  the  plan  of  the  National  Monetary  Com- 
mission was  abandoned,  in  view  of  the  different  types  of 
credit  and  the  varying  rates  for  the  use  of  capital  prevailing 
in  different  parts  of  the  country.  The  new  measure,  as  it 
passed  the  House,  prohibited  the  payment  of  interest  by 
federal  reserve  banks  upon  deposits  of  member  banks.  This 
provision  was  dropped  from  the  bill  in  the  Senate,  but  in 
view  of  the  general  opposition  among  experts  to  the  pay- 
ment of  interest  except  upon  time  deposits,  it  is  not  antici- 
pated that  such  payments  will  be  made  under  the  authority 
of  the  Federal  Reserve  Board. 

It  is  possible  that  interest  will  be  paid  upon  government 
deposits,  in  accordance  with  the  provisions  of  the  law  of 
1907  providing  for  payment  upon  such  deposits  in  national 
banks.  It  is  required  by  the  Federal  Reserve  Act  that  the 
moneys  held  in  the  general  fund  of  the  treasury,  except  the 
5  per  cent,  fund  for  the  redemption  of  national  bank  notes, 
and  the  funds  provided  in  the  new  law  itself  for  the  redemp- 
tion of  federal  reserve  notes,  may  be  deposited  in  federal 
reserve  banks.  This  policy,  however,  is  discretionary  with 
the  Secretary  of  the  Treasury,  who  may,  also,  require  the 
federal  reserve  banks  to  act  as  fiscal  agents  of  the  United 
States.  It  was  objected  to  this  provision  in  some  quarters 
that  the  discretion  given  to  the  Secretary  of  the  Treasury,  to 
deposit  government  funds  in  such  federal  reserve  banks  as 
he  saw  fit,  would  enable  him  to  defeat  the  policy  of  the 
Federal  Reserve  Board  in  the  distribution  of  the  gross  assets 
of  the  federal  reserve  banks  among  themselves;  but  the 
view  finally  prevailed  that,  as  the  Secretary  was  the  respon- 
sible custodian  of  the  public  funds,  he  should  be  allowed 
to  keep  them  where  he  saw  fit.  Already,  by  the  law  of 
March  2,  1911,  the  old  system  of  keeping  the  active  funds 
of  the  Treasury  entirely  in  its  own  vaults  and  branches  was 
modified  so  as  to  permit  the  payment  of  public  dues  by 
individual  checks  when  properly  certified.  The  new  federal 
reserve  law  provides  that  disbursements  of  public  funds  may 


734  HISTORY  OF  MODERN  BANKS   OF   ISSUE. 

be  made  by  means  of  checks  drawn  upon  the  federal  reserve 
banks. 

The  work  of  dividing  the  country  into  districts  under  the 
provisions  of  the  law  was  taken  up  promptly  by  the  Organi- 
zation Committee  provided  for  in  the  Act,  consisting  of  the 
Secretary  of  the  Treasury,  the  Secretary  of  Agriculture,  and 
ultimately  of  the  Comptroller  of  the  Currency,  when  the 
vacancy  existing  in  this  office  was  filled.  This  committee 
heard  the  applications  of  more  than  two  hundred  cities, 
through  their  clearing-house  associations,  Chambers  of 
Commerce,  and  other  representatives,  in  order  to  determine 
the  city  with  which  they  preferred  to  be  connected.  Of 
these  cities  thirty-seven  petitioned  for  designation  as  head- 
quarters of  a  federal  reserve  bank.  As  the  number  of 
reserve  banks  was  limited  to  a  maximum  of  twelve,  this 
number  was  ultimately  provided  for  by  the  Organization 
Committee. 

Strong  arguments  were  presented  to  the  committee  in  New 
York  for  the  creation  of  a  single  district  embracing  the 
entire  country  northeast  of  the  Potomac,  including  the  New 
England  States,  New  York,  New  Jersey,  Pennsylvania, 
Delaware,  and  Maryland.  Such  a  district  would  represent 
individual  deposits  of  nearly  $3,000,000,000,  and  a  subscribed 
capital  for  the  federal  reserve  bank  of  about  $55,000,000. 
It  was  contended  that  a  strong  institution  of  this  character 
was  essential  to  influence  the  foreign  exchanges  and  protect 
the  national  gold  stock.1  The  Organization  Committee 
failed  to  adopt  this  view  and  divided  the  northeast  into  four 
districts — one  for  New  England;  one  for  the  State  of  New 
York;  one  for  Eastern  Pennsylvania,  New  Jersey,  and  Dela- 
ware; and  one  for  Western  Pennsylvania,  Ohio,  and  a  part  of 
Kentucky.  The  headquarters  of  the  remaining  eight  dis- 
tricts were  fixed  at  Richmond,  Atlanta,  Dallas,  Chicago, 
Minneapolis,  St.  L,ouis,  Kansas  City,  and  San  Francisco. 
The  following  table  shows  the  number  of  national  banks  in 
each  district,  according  to  the  reports  to  the  Comptroller  of 

1  r/o>,  testimony  of  the    present  writer   and  others,  New  York 
,  January  5,  1914. 


THE  FEDERAL  RESERVE  ACT. 


735 


the  Currency  on  March  4,  1914,  with  their  capital  and 
surplus  funds,  the  amount  of  the  subscription  required  to 
the  capital  of  the  federal  reserve  bank,  and  the  gross  national 
bank  deposits  by  districts:1 


BANKING   CAPITA!,  OF   RESERVE   DISTRICTS 


Dis- 
trict 
No. 

R  serve  Cities 

National  banks  March  4,  1914 

Num- 
ber  of 
banks 

Capital 
and 
surplus 

6  per  cent, 
subscription 

All  deposits 

1 
2 
3 
4 
5 
6 
7 
8 
9 
10 
11 
12 

Boston  

445 

477 
757 
767 
475 
372 
952 
45S 
687 
836 
731 
514 

$165,409,043 
343,693,437 
208,135,631 
200,123,060 
105,055,023 
77.353,221 
207,997,941 
83,179,348 
78,382,081 
93.166,912 
92,333,673 
130,422,921 

$9,924,543 
20,621,6  6 
12,488,138 
12,007,384 
6,303,301 
4,641,193 
12.479,876 
4,990,761 
4.702,925 
5.590,015 
5.540.C2" 
7,825,375 

$631,356,974 

2,061,858,058 
937,181,166 
851,157,633 
399,579,841 
262,318,818 
1,265,208,464 
378.858,307 
475,684,697 
521,318,350 
307,130,732 
573,243,051 

New  York.. 

Philadelphia 

Cleveland  

Richmond  
Atlanta  
Chicago      

St.  Louis  
Minneapolis.  . 

Kansas  City,  Mo.  .  . 
Dallas     .. 

San  Francisco  
Total  

7,471 

$1,785,252,291 

$107,115,137 

$8,664,896,C91 

After  considerable  delay  in  the  selection  of  members  of  the 
Federal  Reserve  Board,  resulting  in  part  from  differences  of 
opinion  in  the  Senate,  the  board  was  constituted  of  the  follow- 
ing members,  who  were  sworn  into  office  on  August  roth : 

Charles  S.  Hamlin  of  Boston,  who  was  designated  by  the 
President  as  Governor  of  the  Board,  to  serve  two  years; 
Paul  M.  Warburg  of  New  York  City,  for  four  years;  Fred- 
erick A.  Delano  of  Chicago,  for  six  years;  W.  P.  G.  Harding 
of  Birmingham,  Ala.,  for  eight  years ;  Prof.  Adolph  C.  Miller 
of  San  Francisco,  for  ten  years. 

The  Secretary  of  the  Treasury  and  the  Comptroller  of  the 
Currency,  who  became  members  of  the  board  ex-qffido,  were, 
respectively,  William  G.  McAdoo  of  New  York  City  and 
John  Skelton  Williams  of  Richmond. 

1  The  boundaries  of  the  districts,  with  locations  of  the  principal 
cities,  are  shown  by  the  map  on  the  next  page,  reprinted  by  special 
permission  of  the  Secretary  of  the  Treasury. 


736  HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

The  new  board  at  once  undertook  to  grapple  with  the  many 
problems  arising  in  the  American  banking  situation  as  a 
result  of  the  general  war  in  Europe,  but  acted  for  some  time 
in  an  advisory  capacity,  without  organizing  the  federal 
reserve  banks.  There  was  fear  in  some  quarters  that  the 
calls  upon  the  existing  banks  to  pay  in  the  capital  of  the  new 
institutions,  as  required  by  the  law,  and  to  transfer  to  them 
certain  percentages  of  their  legal  reserves,  would  be  difficult 
to  meet  without  seriously  disturbing  the  financial  situation. 


CHAPTER  XXVII. 

THE   BANKS   IN  THE   EUROPEAN  WAR. 

Paralyzing  Effects  of  the  Bursting  of  the  War  Cloud — Action  of  the 
Banks  in  Raising  Discount  Rates  and  Issuing  Small  Notes — 
The  Moratorium  in  Europe  and  Latin  America — Reaction  of  the 
War  on  the  United  States— Issues  of  Emergency  Currency — Help- 
fulness of  the  Federal  Reserve  Board — Success  of  the  Principle 
of  Re-discount  at  the  Banks  of  England,  France,  and  Germany. 

BY  the  events  of  the  war  in  Europe,  which  broke  out  at 
the  beginning  of  August,  1914,  the  banking  and 
credit  system  was  subjected  to  a  test  of  fire.  While 
the  central  banks  of  Germany,  France,  and  Russia  had  been 
for  a  long  time  strengthening  their  gold  reserves,  in  view  of 
the  uncertainties  of  the  military  and  diplomatic  situation  in 
the  Balkans,  the  suddenness  with  which  the  war  finally  broke 
out  among  the  leading  Powers  resulted,  for  a  moment,  in  the 
almost  complete  paralysis  of  the  mechanism  of  exchange. 
Heavy  selling  of  securities,  especially  those  issued  in  America, 
began  on  the  Vienna  Stock  Exchange  soon  after  the  assassina- 
tion of  the  Austrian  Archduke  Francis  Ferdinand,  on  June 
28th,  because  the  probable  action  of  Austria  in  demanding 
reparation  from  Servia  and  the  complications  which  this 
would  involve  with  other  Powers  were  more  promptly  known 
and  appreciated  in  Vienna  than  at  more  remote  points.  The 
selling  of  such  securities  became  more  urgent  after  the  de- 
livery of  the  Austrian  ultimatum  to  Servia  on  July  23d. 
The  Vienna  exchange  closed  on  Monday,  July  2yth,  and 


THE  BANKS  IN-  THE  EUROPEAN  WAR.  739 

other  continental  exchanges  within  a  few  days  following. 
The  London  Stock  Exchange  was  closed  on  July  3ist,  and 
New  York  promptly  followed  on  the  same  day.  Quotations 
of  many  securities  had  declined  on  the  New  York  exchange 
about  ten  points  within  a  week,  and  it  was  obvious  that  a 
further  decline  would  occur,  reaching  the  proportions  of 
panic,  if  the  exchange  remained  open  to  the  avalanche  of 
selling  orders  from  Europe  which  were  awaiting  fulfilment 
on  the  morning  of  July  3ist. 

At  the  European  banks  of  issue,  as  well  as  at  the  joint- 
stock  banks,  a  condition  approaching  panic  prevailed  during 
the  last  week  of  July  and  the  first  week  of  August.  Gold 
disappeared  as  if  by  magic  from  general  circulation ;  the  cen- 
tral banks  practically  ceased  to  pay  out  the  yellow  metal; 
and,  in  some  cases,  long  lines  of  note-holders  waited  at  the 
banks  to  demand  gold  for  notes.  The  Bank  of  England  on 
July  3oth  advanced  its  discount  rate  to  6  per  cent. ;  the  next 
day  to  8  per  cent.;  and  on  August  ist  to  10  percent.  The 
State  Bank  of  Russia  fixed  its  rate  promptly  on  July  2Qth  at 
6  per  cent.  The  Bank  of  France  on  August  ist  adopted  a 
rate  of  7  per  cent.,  the  highest  in  its  history  since  1874;  the 
Imperial  Bank  of  Germany  adopted  a  rate  of  6  per  cent.,  and 
the  Bank  of  the  Netherlands,  6  per  cent.  On  Monday, 
August  3d,  the  Bank  of  Belgium  fixed  its  rate  at  7  per  cent., 
and  the  Austro- Hungarian  Bank  adopted  a  rate  of  8  per  cent. 
On  the  next  day,  the  Bank  of  Norway  raised  its  rate  to  6j 
per  cent.,  and  the  National  Danish  Bank  to  7  per  cent. 

Another  step,  taken  by  nearly  every  European  government, 
was  the  announcement  of  a  moratorium  for  financial  obliga- 
tions.1 This,  in  effect,  gave  the  right  to  the  drawee  of  bills 

1  The  subject  of  giving  a  legal  and  uniform  status  to  the  effects  of 
a  moratorium  was  discussed  at  length  at  the  two  international  con- 
ferences on  bills  of  exchange  and  checks  held  at  The  Hague  in  1910 
and  1912,  but  the  uniform  law  recommended  at  the  second  conference 
had  not  been  generally  adopted  by  the  Powers  before  the  outbreak  of 
the  war.  Vide  Bills  of  Exchange,  Report  of  the  American  Delegation 


740         tttSTOR  Y  OF  MO  DERM  BANKS  OF  ISSUE. 

of  exchange  to  refuse  payment  on  the  date  when  bills  were 
due,  and  relieved  the  holder  from  the  obligation  to  make  pro- 
test in  order  to  hold  the  endorsers.  In  England,  such  a 
moratorium  was  declared  for  thirty  days,  beginning  August 
4th,  but  applying  only  to  .long  bills  of  exchange.  This  was 
extended  on  August  3ist  for  another  month,  or  until  Oc- 
tober 4th,  and  later  until  November  4th.  In  France,  a  mora- 
torium was  decreed  of  wider  application,  including  the 
suspension  of  payments  on  sight-drafts,  which  was  inter- 
preted to  include  deposits  at  the  banks.  In  Germany,  the 
action  taken  was  more  limited  in  character.  It  was  provided 
that  balances  claimed  by  foreigners  residing  abroad,  including 
bills  of  exchange,  could  not  be  sued  for  in  the  courts  for  three 
months,  but  exceptions  might  be  granted  by  the  Imperial 
Chancellor  for  entire  nations  as  well  as  for  individuals.  In 
the  case  of  balances  due  after  July  3ist,  the  courts  were  em- 
powered to  grant  the  debtor  a  respite  of  not  more  than  three 
months,  if  it  seemed  justified  by  the  circumstances,  but  delay 
in  payment  was  not  to  be  granted  if  it  would  impose  too 
great  a  hardship  on  the  creditor.1  Russia  declared  a  mora- 
torium for  two  months  from  July  25th.  Similar  action  was 
taken  by  Italy,  Austria,  Switzerland,  Norway,  Denmark, 
Turkey,  Bulgaria,  and  Egypt. 

The  influence  of  the  financial  paralysis  extended  quickly 
to  the  Latin- American  countries,  which  had  been  depending 
upon  Europe  for  large  loans.  Brazil  declared  a  bank  holiday 
from  August  4th  to  August  I5th,  and  a  moratorium  of  four 
months.  The  Argentine  Republic  declared  a  moratorium  of 
thirty  days  on  80  per  cent,  of  those  credits  which  had  expired 
or  were  about  to  expire  and  a  suspension  of  gold  withdrawals 
from  the  Conversion  Fund.  Similar  action  was  taken  in 
Peru,  Ecuador,  and  Uruguay.  In  Canada,  Parliament  passed 


to  the  Conference  of  1912,  63d  Congress,  ist  Session,  Senate  Docu- 
ment No.  162,  pp.  293-95. 

1  New  York  Evening  Post,  September  8,  1914. 


THE  BANKS  IN  THE  EUROPEAN  WAR.  74* 

an  act  authorizing  the  government  to  declare  a  moratorium 
at  any  time  during  the  war,  but  the  right  was  not  immediately 
exercised. 

Almost  inevitably,  foreign  exchange  was  thrown  into  the 
utmost  confusion,  not  only  between  the  countries  at  war, 
but  with  countries  which  were  neutral.  One  of  the  reasons 
for  this  was  the  paralysis  of  ocean  commerce,  which  made  it 
practically  impossible  to  ship  gold  without  risk  of  capture. 
The  last  heavy  gold  shipment  from  New  York,  amounting 
to  $10,600,000,  made  on  July  28th,  in  partial  settlement  of 
the  sales  of  American  securities  held  abroad,  was  brought 
back  to  the  United  States  by  the  German  steamer,  Kron- 
prinzessin  Cecile,  without  completing  her  voyage,  because 
of  the  fear  of  capture  by  a  British  ship  of  war.  For  a  few 
days,  the  rate  of  exchange  in  New  York  on  L,ondon,  which 
in  normal  times  could  not  well  go  above  $4.90  to  the  pound 
sterling,  went  above  $5,  and  in  some  cases  even  to  $6,  and 
exchange  could  not  be  obtained  in  large  amounts  at  any 
price. 

Out  of  this  welter  of  confusion  and  alarm,  however,  a  com- 
parative degree  of  order  was  soon  developed  by  the  energetic 
action  of  the  banking  authorities  in  England,  France,  the 
United  States,  and  other  countries.  Severe  as  was  the  shock 
given  by  the  outbreak  of  war  to  the  system  prevailing  in 
Europe,  of  a  central  reservoir  of  gold  and  credit  in  the  na- 
tional bank,  measures  were  promptly  taken  to  restore  work- 
able conditions.  In  those  countries  where  gold  was  a  current 
medium  of  circulation, — conspicuously  Great  Britain  and 
France, — authority  was  given  to  relieve  the  dearth  of  small 
money  by  issues  of  notes  of  low  denominations.  The  Bank 
of  France  was  authorized  to  increase  the  limit  of  its  note 
issue  from  6,800,000,000  francs  ($1,300,000,000),  where  it 
was  fixed  by  the  law  of  1906,  to  12,000,000,000  francs 
($2,300,000,000).  At  the  same  time,  the  minimum  denomi- 
nation of  notes,  which  since  the  resumption  of  specie  pay- 
ments after  the  Franco-Prussian  War  had  been  fixed  at  50 


742  HISTOR  Y  OF  MODERN  BANKS  OF  ISSUE. 

francs  ($9.65),  was  reduced  to  5  francs  (96.5  cents)  and  note 
issues  were  authorized  also  for  20  francs  ($3.86). 

The  Bank  of  England  was  authorized  to  suspend  the  Bank 
Act  of  1844,  in  order  to  permit  the  issue  of  notes  in  excess  of 
the  legal  limit,  and  new  forms  of  notes  for  £\  and  for  10 
shillings  were  issued  through  the  bank  with  the  guarantee 
of  the  government. I  In  Switzerland  also,  the  National  Bank 
was  authorized  to  reduce  the  minimum  denomination  of 
notes  from  50  francs  to  20  francs.  In  Holland,  the  minimum 
legal  reserve  of  the  Bank  of  the  Netherlands  was  reduced 
from  40  per  cent,  to  20  percent.,  and  authority  was  given  to 
employ  200,000,000  florins  ($80,000,000)  of  the  increase  in 
the  circulation  which  this  permitted  in  making  loans  secured 
by  bills  and  stocks.  The  bank  was  guaranteed  against  loss 
on  such  loans  by  a  syndicate  of  the  leading  joint-stock 
banks.2 

In  Germany  the  Imperial  Bank  was  authorized  to  suspend 
the  redemption  of  its  notes  in  gold  and  to  issue  notes  without 
paying  the  5  per  cent,  tax  on  excess  issues  which  was  the 
characteristic  feature  of  the  German  bank-note  system.  The 
terms  on  which  commercial  bills  might  be  accepted  were 
made  more  liberal,  and  provision  was  made  for  the  issue 
through  special  loan  offices  of  a  special  form  of  paper,  in 
denominations  from  5  marks  ($1.19)  upward,  for  direct  ad- 
vances on  merchandise  and  securities.3  The  power  to  issue 
small  notes  had  already  been  availed  of  by  the  Imperial 
Bank  of  Germany  and  by  the  State  Bank  of  Russia  before  the 
bursting  of  the  war  cloud.  In  Germany  the  bank  had  de- 
parted in  1906  from  its  original  policy,  of  keeping  the  circu- 


1  These  issues,  which  were  at  first  uncovered,  reached  on  November 
18,  1914,  the  sum  of  £33,890,384  ($165,215,600)  ;  but  by  that  date  were 
protected  by  a  gold  reserve  of  £12,500,000. — London  Statist,  Novem- 
ber 21,  1914,  Ixxxii.,  342. 

3  Wall  Street  Journal,  August  3,  1914. 

3  Berlin  correspondence,  London  Times,  August  10,  1914. 


THE  BANKS  IN  THE  EUROPEAN    WAR.  743 

lation  saturated  with  gold  coin,  by  authorizing  the  issue  of 
notes  for  50  marks  ($11.96)  and  20  marks  ($4.76).  The 
effort  was  at  first  made  to  limit  these  issues  to  300,000,000 
marks  ($72,000,000),  but  early  in  1912  this  limit  was  passed, 
and  within  the  next  two  years  the  issues  of  these  two 
denominations  rose  to  681,822,000  marks,  and  their  ratio  to 
the  total  note  circulation  to  about  26  per  cent.  The  govern- 
ment of  Russia  reversed  in  1904  its  original  policy  of  1897, 
of  saturating  the  circulation  with  gold  coin,  and  adopted  the 
policy  of  issuing  small  notes.  The  notes  of  the  smallest 
denomination,  i  ruble  (51^  cents)  were  retired;  but  notes  for 
3  rubles,  5  rubles,  and  10  rubles  ($5. 15)  were  steadily  pumped 
into  the  circulation  until,  as  early  as  1909,  they  constituted 
46.5  per  cent,  of  the  total  amount  of  paper  outstanding. 
Within  the  next  five  years,  the  gold  in  the  State  Bank  was 
increased  by  about  $170,000,000,  which  nearly  covered  the 
amount  of  $209,430,000  representing  the  increase  in  out- 
standing note  issues. 

In  the  principal  continental  countries  the  scramble  for 
gold  had  been  going  on  actively  all  through  the  year  1913 
and  the  early  part  of  1914.  FronTagold  fund  of  $184, 000,000 
on  December  31,  1912,  the  Imperial  Bank  of  Germany  in- 
creased its  reserve  to  $336,000,000  on  June  30,  1914.  In 
addition,  it  gathered  up  for  the  Imperial  government  a  sum 
of  about  $30,000,000,  to  be  added  to  the  war  fund  of  the  same 
amount  stored  in  the  vaults  of  the  Juliusturm  at  Spandau. 
The  gold  holdings  of  the  Bank  of  France  on  the  eve  of  the 
war  were  $792, 160,000  and  those  of  the  State  Bank  of  Russia, 
$819,700,000.  The  entire  gold  production  of  the  world  dur- 
ing the  eighteen  months  ended  on  June  30,  1914,  was 
approximately  $705,000,000.  Of  this  amount  about  $200,- 
000,000  was  required  for  the  arts  and  $150,000,000  went  to 
British  India.  This  left  about  $355,000,000  to  be  applied  to 
monetary  uses,  and  the  whole  of  this  amount  was  absorbed 
by  the  four  central  banks  of  Germany,  France,  Russia,  and 
Austria- Hungary. 


744  HISTORY  OF  MODERN-  BANKS  OF  ISSUE. 

To  these  gold  war  funds  the  United  States  contributed  up 
to  the  end  of  June,  1914,  about  $84,000,000  in  the  form  of 
gold  exports.  When  the  war-clouds  broke  into  storm,  the 
effort  in  Europe  to  turn  other  forms  of  wealth  into  gold 
caused  gold  exports  from  New  York  in  three  weeks  of  $46,- 
000,000,  and  sales  of  securities  on  the  New  York  Stock 
Exchange  which  would  have  called  for  many  millions 
more.  The  American  market  remained,  up  to  the  very  eve 
of  war,  comparatively  indifferent  to  the  gathering  storm- 
clouds  in  Europe.  Fortunately,  the  finances  of  the  United 
States  were  never  in  a  stronger  position  to  meet  such  a  strain 
than  in  the  closing  days  of  July,  1914.  Even  on  the  stock 
market,  liquidation  had  been  so  long  going  on  and  specula- 
tion had  been  so  discouraging  in  its  results,  that  there  were 
only  a  few  margined  accounts  to  be  thrown  over  and  only 
moderate  loans  outstanding  by  the  banks  to  commission- 
house  brokers. 

In  respect  to  its  gold  equipment,  the  United  States  was 
stronger  in  some  senses  than  even  Russia  and  France,  with 
the  mountains  of  the  yellow  metal  at  the  command  of  their 
central  banks.  The  amount  in  gold  certificates  outstanding 
in  the  United  States  at  near  their  maximum  point,  on  April 
30,  1914,  was  $1,158,997,000.  These  certificates  represent 
simply  deposits  of  gold  on  behalf  of  the  owners  in  the  custody 
of  the  government  and  are  only  apart,  although  a  large  part, 
of  the  gold  resources  of  the  country.  The  Treasury  could 
afford  to  look  on  with  comparative  indifference  while  cer- 
tificates were  turned  into  coin  and  the  coin  went  abroad  ;  for 
neither  of  these  operations  affected  directly  the  legal-tender 
reserve  in  gold,  fixed  by  the  gold  standard  law  of  1900  at 
$150,000,000,  nor  did  they  affect  directly  the  "  free  gold  "  in 
the  Treasury  cash,  which  stood  on  July  3ist  at  a  point  above 
$130,000,000. 

When  it  became  apparent,  however,  that  the  demands  of 
Europe  for  gold  might  be  almost  limitless,  if  she  could  throw 
upon  the  New  York  market  the  great  mass  of  American 


THE  BANKS  IN  THE  EUROPEAN  WAR.     745 

securities  in  which  she  had  invested,  prompt  action  was 
taken  by  the  banking  interests  of  New  York  and  by  the  gov- 
ernment to  meet  the  situation.  First,  on  Friday  morning, 
July  3ist,  came  the  closing  of  the  Stock  Exchange;  at  a 
meeting  of  the  New  York  Clearing  House  Committee  on 
Sunday,  August  2d,  it  was  decided  to  issue  Clearing  House 
certificates  for  use  between  the  banks  in  settling  clearing- 
house balances;  and  on  Saturday,  August  ist,  the  Hon. 
William  G.  McAdoo,  Secretary  of  the  Treasury,  arrived  in 
New  York  and  entered  into  conferences  with  the  banking 
interests,  with  the  result  that  the  Treasury  arranged  for  the 
prompt  issue  of  emergency  bank-notes  to  enable  the  banks  to 
substitute  notes  for  gold  certificates  in  the  circulation,  and 
thereby  husband  their  gold  and  build  up  their  reserves. 
These  reserves  had  fallen  from  $466, 5 7 7,000  for  the  week  of 
July  25th,  to  $444,434,000  on  August  ist,  and  fell  still  further, 
under  the  pressure  of  gold  exports,  to  $382,732,000  on 
August  1 5th.  After  that  date,  however,  began  a  recovery, 
stimulated  by  the  steps  taken  to  increase  the  supply  of  cur- 
rency and  protect  the  national  stock  of  gold. 

It  was  the  facilities  created  by  the  Aldrich-Vreeland  law 
of  1908  which  afforded  an  adequate  supply  of  currency  to 
the  banks,  guarded  against  the  fear  of  monetary  stringency, 
and  put  it  in  the  power  of  the  banks  to  husband  their  gold 
resources.  The  power  to  issue  currency  expired  under  the 
act  itself  on  June  30,  1914,  but  this  period  was  extended  by 
the  Federal  Reserve  Act  to  June  30,  1915.  Currency  had 
already  been  printed  in  considerable  amounts  and  deposited 
in  the  sub-treasuries,  to  be  issued  if  called  for.  As  a  result 
of  this  precaution,  the  Treasury  was  able  to  issue  to  the 
national  banks  of  New  York  City  alone,  within  the  first  six 
days  of  August,  $38,780,000  in  new  notes,  and  these  amounts 
were  rapidly  increased,  until  the  amount  thus  issued  had 
risen  on  August  27th  to  $103,309,260,  in  addition  to  a  nearly 
equal  amount  to  national  banks  in  other  places. 

In  the  meantime,  action  was  taken  by  the  government  to 


746        nisroR  Y  OF  MODERN  BANKS  OF  ISSUE. 

remove  some  of  the  burdens  imposed  upon  the  issue  of  this 
currency  under  the  law  of  1908  and  the  amendments  of  1913. 
The  tax  on  new  issues,  fixed  by  the  act  of  1908  at  the  annual 
rate  of  5  per  cent,  for  the  first  three  months,  was  reduced  by 
the  Federal  Reserve  Act  to  3  per  cent.,  and  the  additional 
tax  accruing  after  three  months  was  reduced  from  i  per 
cent,  to  one- half  of  i  per  cent,  for  each  additional  month. 
These  rates  of  taxation  were  not  changed  in  the  law  which 
was  passed  by  both  houses  of  Congress  during  the  first  three 
days  of  August  and  was  approved  by  the  President  on 
August  4,  1914. 

The  original  law  required,  however,  that  a  bank  must 
have  a  bond-secured  circulation  of  not  less  than  40  per  cent, 
of  its  capital  stock,  in  order  to  obtain  new  circulation;  that 
the  total  circulation  of  any  bank,  including  that  secured  by 
bonds,  should  not  at  any  time  exceed  the  amount  of  its  un- 
impaired capital  and  surplus;  and  that  the  total  amount  of 
circulation  issued  under  the  provisions  of  the  law  should  not 
exceed  $500,000,000.  All  these  requirements  were  placed  by 
the  act  of  August  4,  1914,  in  the  discretion  of  the  Secretary 
of  the  Treasury,  to  suspend,  if  he  saw  fit,  provided  that  the 
total  circulation  of  any  bank  should  not  exceed  1 25  per  cent, 
of  its  unimpaired  capital  and  surplus.  The  amount  of  the 
redemption  fund  to  be  kept  in  the  Treasury,  which  was  fixed 
by  the  law  of  1908  at  10  per  cent ,  was  placed  by  the  new  law 
in  the  discretion  of  the  Secretary  of  the  Treasury,  provided 
that  it  should  not  be  less  than  5  per  cent,  of  the  notes  out- 
standing. These  changes  greatly  diminished  the  burden 
imposed  upon  the  banks  in  the  issue  of  additional  notes  and 
raised  the  limit  of  possible  issues  to  approximately  $1,400,- 
000,000,  which  was  the  difference  between  the  maximum 
limit  of  circulation  fixed  by  the  new  law  and  the  amount  of 
national  bank-notes  already  outstanding. 

The  banks,  by  the  aid  of  this  additional  circulation,  were 
enabled  to  employ  bank  notes  in  meeting  obligations  to  the 
public,  to  retain  gold  and  gold  certificates  in  their  reserves, 


THE  BANKS  IN  THE  EUROPEAN  WAR.  747 

and  to  refrain  from  calling  loans  to  stock-brokers  and  other 
borrowers  in  a  manner  which  would  have  caused  difficulties 
and  perhaps  numerous  failures,  in  view  of  the  fact  that  the 
open  market  for  the  sale  of  securities  had  disappeared  with 
the  closing  of  the  Stock  Exchange  and  that  such  sales  could 
be  made  only  at  low  and  uncertain  prices.  Some  further 
changes  in  the  law  of  1908  were  proposed  later  in  the  session 
of  Congress,  but  were  not  considered  so  urgent  as  those  em- 
bodied in  the  act  of  August  4th,  and  did  not  receive  im- 
mediate consideration. 

For  the  purpose  of  terminating  the  deadlock  in  foreign 
exchange,  several  measures  were  perfected,  some  being  put 
into  operation  within  a  few  days  after  the  outbreak  of  war  and 
others  not  until  the  middle  of  September.  It  was  announced 
on  Thursday,  August  6th,  that  the  government  of  France 
had  deposited  with  the  Paris  office  of  J.  P.  Morgan  &  Com- 
pany, a  sum  of  about  $6,000,000,  which  was  subject  to  drafts 
by  the  French  Ambassador  in  Washington.  By  means  of 
checks  drawn  upon  this  fund,  but  delivered  to  J.  P.  Morgan 
&  Company  in  New  York,  the  French  government  would 
be  able  to  purchase  supplies  in  the  United  States,  and  the 
drafts  would  release  an  equal  amount  of  money  in  Paris, 
which  could  be  applied  to  obligations  of  American  bankers 
and  importers  there.  These  deposits  by  the  French  govern- 
ment were  afterwards  considerably  increased.  A  move  in  the 
same  direction  was  announced  by  the  Bank  of  England  on 
August  nth,  by  which  the  Canadian  Treasury  Department 
was  made  a  branch  of  the  bank  and  custodian  of  the  gold  to 
be  received  from  New  York.  By  this  arrangement  the  gold 
held  on  the  American  side  of  the  Atlantic  could  be  counted 
as  a  part  of  the  reserve  of  the  Bank  of  England  against  its 
note  issues  and  deposit  liabilities  in  England. 

These  measures  were  only  preliminary,  however,  to  the 
settlement  of  the  serious  difficulties  arising  from  the  large 
indebtedness  of  the  United  States  to  Europe,  and  specially 
to  England,  The  suspension  of  the  outward  movement  of 


HISTOR  Y  OF  MODERN  BANKS  OF  ISSUE. 

wheat  and  cotton  cut  off  the  supply  of  bills  of  exchange 
usually  available  in  the  Autumn,  and  left  no  means  of  remit- 
tance except  the  shipment  of  gold.  This  the  New  York, 
banks  were  unwilling  to  part  with,  in  view  of  their  reduced 
reserves,  and  for  a  time  something  like  a  deadlock  existed 
in  the  exchange  market,  with  rates  for  bills  on  I^ondon  at 
7  or  8  cents  to  the  pound  sterling  above  the  usual  gold 
shipping  point.  In  meeting  this  situation  the  Federal  Re- 
serve Board,  constituted  by  the  law  of  December  23,  1913, 
rendered  its  first  conspicuous  service  by  assuming  leadership 
in  unifying  the  banking  resources  of  the  country.  Although 
the  Board  was  vested  with  only  moral  influence  before  the 
opening  of  the  federal  reserve  banks  on  November  i6th,  it  was 
recognized  at  once  as  a  central  authority  to  which  banking 
and  commercial  interests  could  lock  in  forming  plans  for 
relief. 

It  was  upon  the  banks  of  New  York  that  the  chief  pressure 
fell  during  the  early  weeks  of  the  war,  before  the  appointment 
of  the  Federal  Reserve  Board.  Their  task  was  rendered 
heavier  by  the  fact  that  the  municipal  government  of  New 
York  had  incurred  temporary  indebtedness  abroad  to  the 
amount-of  about  $83,000,000  by  the  issue  of  notes  maturing 
at  various  dates  from  September,  1914,  to  January,  1915. 
It  was  felt  among  New  York  bankers  that  the  credit  of 
the  city  would  be  seriously  impaired  if  these  notes  were 
not  met  at  maturity;  and  of  their  own  volition,  largely,  they 
made  up  a  pool  to  take  new  notes  from  the  city,  paying  6 
per  cent,  and  to  find  the  gold  or  the  exchange  to  meet  the 
obligation  abroad  as  it  matured.  When  the  question  arose 
of  meeting  other  foreign  obligations,  however,  the  aid  of  the 
Federal  Reserve  Board  was  invoked  and  an  appeal  was  made 
to  the  banks  in  the  52  reserve  cities  of  the  country  to  con- 
tribute their  share  to  a  common  fund  in  gold  or  exchange. 
Through  these  general  contributions  the  pressure  upon  the 
banks  of  New  York  was  distributed  over  a  wider  area  and 
rendered  less  acute  than  in  previous  crises,  The  gold  which 


TtfE  BAttKS  IN  THE  EUROPEAN  WAR.  749 

was  thus  made  available  for  exchange  was  delivered  to  the 
Bank  of  England,  which  accepted  delivery  at  its  branch  in 
Ottawa  with  the  Canadian  Treasury.  On  the  two  opera- 
tions on  the  New  York  City  debt  and  the  general  gold  pool, 
with  some  few  independent  transactions,  the  amount  of 
gold  shipped  to  Canada,  down  to  November  10,  1914,  was 
$73,318,000. x  These  operations  were  so  effective  in  restor- 
ing confidence  that  of  $100,000,000  subscribed  to  the  gold 
pool,  only  $25,000,000  was  actually  called,  and  a  part  of 
this  was  repaid  to  the  subscribers  during  the  closing  days  of 
November. 

The  most  disturbing  factor  in  the  exchange  situation, 
however,  as  well  as  in  the  field  of  domestic  production,  was 
the  temporary  cessation  of  exports  of  raw  cotton, — the  pro- 
duct upon  which  large  sections  of  the  South  relied  almost 
entirely  for  their  subsistence.  In  forming  a  banking  pool  to 
make  loans  upon  cotton,  the  lead  was  taken  by  Mr.  Festus 
J.  Wade,  the  St.  Louis  banker,  but  ultimately  the  approval 
of  the  Federal  Reserve  Board  was  sought  and  a  sub-com- 
mittee of  the  board  was  appointed  to  aid  in  the  administra- 
tion of  the  lending  fund  of  $135, 000,000,  which  it  was  planned 
to  raise.  About  the  middle  of  October  relief  was  afforded  to 
the  cotton  producers  by  the  announcement  that  Great  Britain 
would  not  treat  cotton  as  contraband  of  war  and  would  not, 
therefore,  interfere  with  its  shipment  to  manufacturing 
countries.  During  late  October  and  early  November  another 
factor  in  diminishing  the  need  for  shipping  gold  abroad  was 
the  appearance  in  the  American  market  of  large  orders  for 
shoes,  automobiles,  and  other  supplies  from  the  Powers  of 
Europe. 

Under  these  favoring  influences  exchange  on  London, 
which  had  remained  considerably  above  the  gold  shipping 
points  for  several  weeks  after  the  formation  of  the  general 
gold  pool,  fell  before  the  close  of  October  to  normal  rates  in 


1  Wall  Street  Journal,  November  10,  1914. 


75°          HISTORY  OF  MODERN  BANKS  OF  ISSUE. 

time  of  peace.  Currency,  in  the  meantime  had  begun  to 
flow  back  to  New  York  from  the  interior,  until  by  October 
24th  the  average  reserves  of  the  Clearing  House  banks  stood 
at  1441,882,000,  or  nearly  the  amount  on  August  ist,  and 
$8,460,650  above  legal  requirements.  The  gain  in  cash 
would  have  been  much  larger  if  the  New  York  banks  had 
not  begun  to  apply  their  surplus  funds  to  the  retirement  of 
emergency  bank-notes,  which  had  become  subject  in  most 
cases  to  the  tax  of  3 \  per  cent,  imposed  by  the  law  after  they 
had  been  in  circulation  for  three  months.  The  cancellations 
of  note  issues  by  the  national  banks  of  New  York  City  alone 
reached  $100,224,390  up  to  December  3d  ;  but  the  net  de- 
crease was  less  for  the  country,  because  Southern  banks 
gradually  increased  their  issues  in  connection  with  the 
movement  of  the  cotton  crop.  The  maximum  of  emergency 
issues,  however,  which  stood  on  October  23,  1914,  at  $368,- 
616,990,  declined  on  December  3d  to  about  $242,000,000- 
The  redundancy  of  currency  and  the  accumulation  of  idle 
capital  in  the  meantime  caused  a  reduction  in  the  rate  for 
"  call  money  "  in  New  York  to  5^  per  cent,  by  the  middle 
of  November,  while  the  rate  for  commercial  paper  tended  to 
sag  below  6  per  cent.  *  At  the  beginning  of  December  it 
was  announced  also  that  all  the  Clearing  House  loan  certifi- 
cates issued  to  New  York  banks,  which  reached  an  aggre- 
gate of  $124,695,000,  had  been  retired. 

One  of  the  most  notable  monetary  lessons  of  the  crisis 
was  the  success  of  the  re-discount  policy  of  the  Bank  of 
England  in  protecting  British  credit  and  maintaining  the 
reputation  of  London  as  the  clearing  house  of  the  world. 
At  the  outbreak  of  the  panic  the  Bank  of  England  was  poorly 
equipped  with  gold  in  comparison  with  the  Continental 
banks,  relying,  as  usual,  upon  the  ability  of  the  London 
market  to  draw  gold  from  other  countries  through  the  foreign 
bills  accepted  by  London  banks.  The  Bank  of  England  had 


1  Wall  Street  Journal,  November  12,  1914. 


THE  &ANKS  IN  THE  EUROPEAN  WAR.     7$ I 

not  been  a  party  to  any  considerable  extent  to  this  class  of 
business,  and  for  a  few  days  the  fact  that  the  joint-stock 
banks  were  unable  to  collect  the  obligations  due  to  them 
from  abroad  threatened  a  breakdown,  which  would  have 
greatly  impaired,  if  not  destroyed,  the  prestige  of  I^ndon  as 
a  financial  centre. 

The  question  arose,  also,  which  had  arisen  in  previous 
crises,  whether  the  banking  reserve  of  the  Bank  of  England 
would  be  adequate  to  meet  the  increased  demands  upon  it 
for  discounts.  There  was  grave  danger  that  the  mere  sus- 
pension of  the  bank  act,  which  had  saved  the  situation  in 
the  domestic  crises  of  1847,  l857>  and  l866»  would  go  but  a 
little  ways  towards  averting  panic  in  a  period  of  universal 
suspension  of  gold  payments  on  the  Continent  and  the  general 
adoption  of  the  moratorium.  The  British  government  rose 
resolutely  to  the  requirements  of  the  occasion  by  announcing, 
on  August  1 2th,  that  they  would  practically  guarantee  the 
Bank  of  England  against  loss  on  bills  of  exchange  re-dis- 
counted for  the  joint-stock  banks  and  the  bill  houses,  where 
such  documents  had  been  accepted  before  August  4,  1914. 
The  bank  was  able,  under  this  authority,  to  make  the  fol- 
lowing announcement : 

"The  Bank  of  England  are  prepared,  on  the  application 
of  the  holder  of  any  approved  bill  of  exchange  accepted  be- 
fore August  4,  1914,  to  discount  at  any  time  before  its  due 
date  at  Bank  rate,  without  recourse  to  such  holder,  and 
upon  its  maturity  the  Bank  of  England  will,  in  order  to  as- 
sist the  resumption  of  normal  business  operations,  give  the 
acceptor  the  opportunity  until  further  notice  of  postponing 
payment,  interest  being  payable  in  the  meantime  at  2  per 
cent  over  Bank  rate  varying.  Arrangements  will  be  made 
to  carry  this  scheme  into  effect  so  as  to  preserve  all  existing 
obligations. 

"  The  Bank  of  England  will  be  prepared  for  this  purpose 
to  approve  such  bills  of  exchange  as  are  customarily  dis- 
counted by  them  and  also  good  trade  bills  and  the  acceptances 


HISTORY  OF  MODERN  BANKS   OF  ISSU&. 

of  such  foreign  and  Colonial  firms  and  bank  agencies  as  are 
established  in  Great  Britain." 

The  result  of  this  policy  was  a  flood  of  demands  upon  the 
Bank  of  England,  which  for  several  days  exhausted  its 
clerical  force  and  compelled  it  to  suspend  re- discounts  at  an 
early  hour  in  the  day.  On  July  3oth,  the  *'  other  securities  " 
held  by  the  bank,  which  represented  commercial  paper  and 
other  collateral  held,  apart  from  government  obligations, 
stood  at  the  comparatively  normal  point  of  ^"47,307,000 
($230,625,000).  This  amount  was  increased  during  the  fol- 
lowing week  to-^65, 351,000;  in  the  next  week  to  ^70,786,000 ; 
in  the  week  of  August  2oth,  after  the  government  guarantee 
was  announced,  to  ^"94,726,000;  and  in  the  week  of  August 
27th,  to  ^"109,904,000  ($535,800,000).  The  pressure  upon  the 
banking  reserve  was  such  that  the  proportion  usually  main- 
tained,— 40  per  cent,  or  more  in  notes  against  deposits, — fell 
in  the  week  of  August  7th  to  14.60  per  cent.  During  the 
next  three  weeks  gold  arrived  in  considerable  amounts  from 
South  Africa,  America,  and  other  sources,  and  increased  the 
bullion  holdings  of  the  bank  from  a  minimum  of  ^27, 622,000 
($134,650,000)  on  August  7th,  to  ^33,014,000  on  August 
i&h,  /37>959>ooo  on  August  2oth,  and  ^43,473,000  ($211,- 
950,000)  on  August  27th. 

Thus,  within  three  weeks,  the  gold  resources  of  the  bank 
were  increased  by  nearly  $80,000,000;  but  even  these  great 
gains  in  the  yellow  metal  raised  the  banking  reserve  against 
deposits  to  only  17.20  per  cent,  on  August  i3th,  and  it  was 
several  weeks  before  this  ratio  was  materially  exceeded. 
Ultimately,  however,  the  ratio  increased  to  24.51  per  cent,  on 
October  8th,  and  continued  to  rise,  with  the  increase  in  the 
gold  stock  and  in  the  liquidation  of  maturing  loans.  The 
bank  was  able  to  reduce  its  discount  rate  on  August  i3th  to 
5  per  cent.,  and  the  restoration  of  confidence,  coupled  with 
the  cessation  of  stock-exchange  business,  enabled  the  joint- 
stock  banks  to  offer  money  by  the  middle  of  September  as 
low  as  2f  per  cent. 


THE  BANKS  IN  THE  EUROPEAN  WAR.  753 

The  joint-stock  banks,  which  were  naturally  timid  about 
re-discounting  acceptances  payable  by  foreigners,  in  view  of 
the  general  moratorium,  followed  the  same  policy  which 
they  had  pursued  in  earlier  crises,  of  carrying  the  proceeds  of 
their  borrowing  from  the  bank  to  the  credit  of  their  deposit 
accounts,  in  order  to  increase  their  available  cash  resources 
and  improve  the  appearance  of  their  balance  sheets.1  As  a 
result,  the  item  of  "other  deposits,"  apart  from  those  of  the 
government,  increased  from  ^54,418,000  on  July  3oth,  to 
,£146,646,000  ($714,900,000)  on  October  8th.  From  this 
time  set  in  a  tendency  to  decline  in  such  deposits,  which  in- 
dicated that  the  severity  of  the  tension  was  over  and  that 
the  joint-stock  banks  were  beginning  to  take  care  of  their 
clients  from  their  own  resources. 

In  Germany  and  France  similar  support  was  given  by  the 
central  bank  to  the  joint-stock  banks  and  to  mercantile  credit. 
In  Germany  the  item  of  discounts  at  the  Imperial  Bank,  which 
stood  on  July  I5th  at  807,651,000  marks  ($192,000,000)  had 
risen  on  September  23d  to  3,889,200,000  marks  ($925,000,- 
ooo).  This  great  volume  of  re-discounts  was  met  chiefly  by 
the  issue  of  notes,  which  increased  from  1,890,893,000  marks 
($448,250,000)  outstanding  on  July  24th  to  4,382,902,000 
marks  ($1,041,500,000)  on  October  i2th.  A  part  of  this 
issue  of  paper  was  offset  by  the  absorption  of  the  floating 
gold  stock  into  the  vaults  of  the  bank.  The  war  fund  which 
had  been  held  by  the  government  in  the  Castle  of  Spandau 
was  turned  over  to  the  Imperial  Bank  to  the  amount  of  about 
$50,000,000,  and  gold  coin  in  circulation  was  gathered  up 
under  appeals  by  the  press  to  patriotic  spirit,  until  the  total 
holdings  of  gold,  which  had  been  1,356,540,000  marks 
($322,500,000)  on  July  25th,  rose  to  1,754,800,000  marks 
($417,000,000)  on  October  i2th.  While  the  policy  of  specie 
suspension  adopted  by  the  bank  sent  the  quotation  for  marks 
in  New  York  nearly  10  per  cent,  below  gold  parity,  the  free 


Vide  supra,  page  131. 


754          HISTORY  OF  MODERN  BANKS   OF  ISSUE. 

extension  of  credit  to  domestic  borrowers  prevented  the  adop- 
tion of  a  general  moratorium  and  encouraged  subscriptions 
to  the  war  loans,  which  were  facilitated  by  advances  upon  a 
variety  of  securities  which  would  not  have  been  accepted 
under  normal  conditions.  At  the  Bank  of  France,  during  a 
single  week,  discounts  at  Paris  alone  rose  from  543,511,070 
francs  ($105,000,000)  on  July  23d  to  1,364,338,582  francs 
($263,600,000)  on  July  3oth.  Publication  of  the  weekly  re- 
ports was  t  hen  suspended  and  the  further  great  volume  of 
discounts  for  the  support  of  French  finance  was  not  officially 
made  known. 

In  these  and  other  countries,  the  power  of  re-discount 
proved  an  effective  weapon  for  meeting  the  immediate  needs 
of  the  mercantile  community  and  averting  panic.  In  Eng- 
land the  moratorium  came  to  an  end  almost  unnoticed  on 
November  4th ;  loans  by  the  Bank  of  England  fell  from  a 
maximum  of  ^149,843,000  on  September  3d  to  ^"122,108,000 
on  November  5th;  and  plans  were  making  in  both  lyondon 
and  New  York  for  the  early  opening  of  the  stock  exchanges. 


LIST   OF  AUTHORITIES 
CONSULTED  IN  THE  PREPARATION  OF  THIS  WORK. 


The  following  are  the  full  titles  of  the  leading  financial  and 
historical  authorities  consulted  in  the  preparation  of  this  work  and 
referred  to  in  the  text.  Documents  and  periodicals  referred  to  for 
particular  facts,  and  fully  described  where  cited,  are  not  given  here. 
The  works  are  cited  in  the  text  by  the  name  of  the  author  only, 
where  only  one  of  his  works  has  been  used,  and  with  the  name  of  the 
work  in  addition  where  two  or  more  works  of  the  same  author  have 
been  used. 

A  History  of  Banking  in  All  the  Leading  Nations.     4  vols.      Edited 

by  the  editor  of  the  Journal  of  Commerce,  New  York,  1896. 
Adams,  Henry.     History  of  the  United  States  of  America.     9  vols. 

New  York,  1889-91. 
Allard,  Alphonse.     La  Crise  Agricole  et  Monetaire.     Brussels  and 

Paris,  1895. 
Ansiaux,  Maurice.     La    Question    Monetaire    en   Belgique.     Liege, 

1892. 
Anspach,  Alfred.     La  Russie  Economique  et  VCEuvre  de  M.  de  Witte. 

Paris,  1904. 

Arnaund,  Auguste.     La  Monnaie,  le  Credit  et  le  Change.     3d  edi- 
tion.    Paris,  1906. 
Bagehot,  Walter.     Complete  Works.     Edited  by   Forrest  Morgan. 

5  vols.     Hartford,  1889. 
Blanqui.     Histoire  de  VEconomie  Politique  en   Europe   depuis   les 

Anciens,  jusqu'  a  Nos  Jours.     2  vols.     Paris,  1860. 
Boissevain,  G.  M.     La  Question  Monetaire.     Paris,  1895. 
Bolles,  Albert  S.     The  Financial  History  of  the   United  States.     3 

vols.     New  York,  1884-86. 
Bouchmil,  O.     Origines  et  Creation  de  la  Banque  Nationals  Suisse. 

Montpelier,  1906. 

755 


756  LIST  OF  AUTHORITIES. 

Breckenridge,  Roeliff  Morton.  The  Canadian  Banking  System, 
181^-1890.  Publications  of  the  Am.  Economic  Association, 
X.,  1-3.  New  York,  1894. 

British  Museum:  Babylonian  and  Assyrian  Antiquities.  London, 
1900. 

Brouet,  Gaston.  Le  Developpement  Economique  et  Financier  de 
Vltalie.  Paris,  1904. 

Casasus,   Joaquin   D.   Les  Institutions  de  Credit.     Brussels,    1900. 

Cauwes  (P.),  Souchon  (A.),  Bourguin  (M.).  Questions  Monetaires 
Contemporaines.  Paris,  1905. 

Century  Magazine.  "Cheap  Money  Experiments  in  Past  and 
Present  Times.  "  New  York,  1892 

Chalmers,  Robert.  A  History  of  Currency  in  the  British  Colonies. 
London,  1893. 

Clews,  Henry.  Twenty-eight  Years  in  Wall  Street.  New  York, 
1888. 

Coghlan,  T.  A.  A  Statistical  Account  of  the  Seven  Colonies  of 
Australasia.  Sydney,  1898. 

Commission  on  International  Exchange.  Report  on  the  Introduction 
of  the  Gold  Exchange  Standard  into  China  and  Other  Silver- 
Using  Countries.  2  vols.  Washington,  1903-04. 

Conant,  Charles  A.  The  Principles  of  Money  and  Banking.  2 
vols.  New  York,  1905. 

Cons,  Henri.  Precis  d'Histoire  du  Commerce.  2  vols.  Paris 
and  Nancy,  1896. 

Cooley,  Thomas  M.  Michigan:  A  History  of  Governments.  Boston, 
1885. 

Corn  well,  William  C.  The  Currency  and  the  Banking  Law  of  the 
Dominion  of  Canada.  New  York  and  London,  1895. 

Cossa,  Luigi.  An  Introduction  to  the  Study  of  Political  Economy. 
Translated  by  Louis  Dyer.  London  and  New  York,  1893. 

Courcelle-Seneuil,  J.  G.  Traite  Theorique  et  Pratique  des  Opera- 
tions de  Banque.  Paris,  1876. 

Courtois,  Alphonse,  fils.  Histoire  des  Banques  en  France.  Paris, 
1881. 

Cruchon,  Gustave.     Les  Banques  dans  VAntiquite.     Paris,  1879. 

Cunningham,  W.  The  Growth  of  English  Industry  and  Commerce. 
2  vols.  Cambridge,  England,  1892. 

Currency,  The.  Report  by  the  Special  Committee  of  the  Chamber 
of  Commerce  of  the  State  of  New  York,  1906. 

De  Beaufort,  R.  Ledos.  L 'Achievement  et  r Application  de  la  Re- 
forme  Monetaire  de  la  Russie.  Paris,  1899. 

De  Carvalho,  Alberto.  La  Crise  Financiere  au  Bresil.  Lisbon, 
1897. 


LIST  OF  AUTHORITIES.  757 

De  Cyon,  E.     M.  Witte  et  les  Finances  Russes.     Paris,  1895. 

De  Laveleye,  Emile.     Elements  d'Economie  Politique.     Paris,  1892. 

Deloume,  Antonin.  Les  Manieurs  d' Argent  &  Rome,  jusqu'  a 
I  'Empire.  Paris,  1892. 

Denizet,  Pierre.     Les  Banques  Coloniales.     Paris,  1899. 

D£tieux,  Marcel.  La  Question  Monetaire  en  Indo-Chine.  Paris, 
1907. 

Dillon,  Malcolm.  The  History  and  Development  of  Banking  in 
Ireland,  from  the  Earliest  Times  to  the  Present  Day.  Dublin, 
1889. 

Dubois,  Joseph.  U Empire  de  V Argent:  Etude  sur  la  Chine  Finan- 
ciere.  Paris,  1906. 

Dumolard,  Henry.  Le  Japon,  Politique,  Economique  et  Social. 
Paris,  1903. 

Dunbar,  Charles  F.  Chapters  on  the  Theory  and  History  of  Bank- 
ing. New  York  and  London,  1893. 

Economic  Essays.  Edited  by  O.  M.  W.  Sprague.  New  York, 

1904. 

Easton,  H.  T.     Banks  and  Banking.     London,  1896. 

Fachan,  J.  M.  Historique  de  la  Rente  Franfaise  et  des  Valeurs 
du  Tresor.  Paris  and  Nancy,  1904. 

Favre,  Jean.     Les  Banques  au  Mexique.     Paris,  1907. 

Les  Changes  Deprecies.     Paris,  1906. 

Felch,  Alpheus.  Early  Banks  and  Banking  in  Michigan.  Sen. 
Ex.  Doc.  38,  52d  Cong.,  2d  Sess. 

Frederiksen,  N.  C.  Finland :  Its  Public  and  Private  Economy. 
London, 1902. 

Garrot,  Henri.     La  Banque  de  VAlgerie.     Paris,  1892. 

Gide,  Charles.     Principes  d'Economie  Politique.     Paris,  1894. 

Giffen,  Robert.     Essays  in  Finance.     2  vols.     New  York,  1886. 

Gilbart,  J.  W.  The  History,  Principles,  and  Practice  of  Banking. 
Revised  by  Ernest  Sykes.  2  vols.  London,  1907. 

Gomel,  Charles.  Les  Causes  Financieres  de  la  Revolution  Francaise 
et  les  Dernier s  Controkurs  Generaux.  Paris,  1893. 

Goschen,  George  J.  The  Theory  of  the  Foreign  Exchanges.  Lon- 
don, 1895. 

Goumain-Cornille.     Les  Banques  Coloniales.     Paris,  1902. 

Hallam,  Henry.  View  of  the  State  of  Europe  during  the  Middle 
Ages.  2  vols.  New  York,  1880. 

Hamilton,  Alexander.  Works  of.  9  vols.  New  York  and  Lon- 
don, 1885. 

Hankey,  Thomson.  The  Principles  of  Banking,  its  Utility  and 
Economy;  with  Remarks  on  the  Working  and  Management  of 
the  Bank  of  England.  London,  1887. 


758  LIST  OF  AUTHORITIES. 

Haupt,  Ottoman     The  Monetary  Question  in  1892.     London,  1892. 
Helfferich,  Karl.     Les  Finances  des  Belligcrants.     Paris,  1904. 
Hepburn,    A.    Barton.     History  of  Coinage    and    Currency  in    the 

United   States   and   the   Perennial  Contest  for  Sound   Money. 

New  York  and  London,  1903. 

Horn,  J.  E.     La  Liberte  des  Banques.     Paris,  1866. 
Howarth,  William.     The  Banks  in  the  Clearing  House.     London, 

1905. 
Jannet,  Claudio.     Le  Capital,  la  Speculation  et  la  Finance  au  Dix- 

neuvieme  Siecle.     Paris,  1892. 
Le  Credit  Populaire   et   les   Banques   en   Italie   du   XVe  au 

XVILIe  Siecle.     Paris,  1885. 
Jevons,  W.  Stanley.     Investigations    in    Currency    and    Finance. 

London,  1884. 
Juglar,  Clement.     Des    Crises    Commercials    et    de    Leur    Retour 

Periodique  en  France,  en  Angleterre  et  aux  Etats-Unis.     Paris, 

1889. 

Kent,  James.     Commentaries  on  American  Law.     Thirteenth  edi- 
tion.    Edited  by  Charles  M.  Barnes.     4  vols.     Boston,  1884. 
Kinley,  David.     The   History,   Organization,   and   Influence  of  the 

Independent  Treasury  of  the  United  States.     New  York,  1893. 
Knox,  John  J.      United  States  Notes.     New  York,  1884. 
Lacombe,  Eugene.     Le  Change  Espagnol.     Paris,  1901. 
Lawson,  W.  R.     American  Industrial  Problems.     New  York,  Edin- 
burgh, and  London,  1903. 

British  Economics  in  1904.     London  and  Edinburgh,   1904. 

Lenormant,    Fra^ois.      La    Monnaie   dans    VAntiquite.      3    vols. 

Paris,  1878. 
Leroy-Beaulieu,  Paul.     Traite  de  la  Science  des  Finances.     Fifth 

edition.     2  vols.     Paris,  1892. 
Levi,  Leone.     Tlie  History  of  British  Commerce  and  of  the  Economic 

Progress  of  the  British  Nation,  1763-1878.     London,  1880. 
LeVy,  Raphael-Georges.     Melanges  Financiers.     Paris,  1894. 
Lois  et  Statuts  qui  Regissent  la  Banque  de  France.    Paris,  1887. 
Lorini,  Eteocle.     La  Reforme  Monetaire  de  la  Russie.     Traduction 

Frangais  by  Raphael  Ledos  de  Beaufort.     Paris,  1898. 
McCarthy,  Justin.     A  History  of  Our  Own  Times,  from  the  Accession 

of  Queen   Victoria  to  the  General  Election  of  1880.     2   vols. 

New  York,  1881. 
McCulloch,  Hugh.     Men  and  Measures  of  Half  a  Century.     New 

York,  1889. 
McMaster,  John  Bach.     A    History   of  the   People   of  the    United 

States,  from  the  Revolution  to  the  Civil    War.     4    vols.   (to  be 

completed  in  6  vols.).     New  York,  1885-95. 


LIST  OF  AUTHORITIES.  759 

Macaulay,  Thomas  Babington.     History  of  England. 

MacLeod,  Henry  Dunning.  The  Elements  of  Banking.  London, 
1891. 

Tlte  Theory  and  Practice  of  Banking.     London,  1892. 

The  Theory  of  Credit.     2  vols.     London,  1891-94. 

Matsukata,  Masayoshi.  Report  on  the  Adoption  of  the  Gold  Stand- 
ard in  Japan.  Tokio,  1899. 

Report  on  the  Post-Bellum  Financial  Administration.     Tokio, 

1900. 

Meliot,  M.  and.  A.  Dictionnaire  Illustre  des  Monnaies.  Paris, 
1906. 

Mill,  John  Stuart.     Principles  of  Political  Economy,  with  Some  of 
Their  Applications  to  Social  Philosophy.     2  vols.     New  York, 
^1893. 

Mitjavile,  Henri      La  Crisedu  Change  en  Espagne.     Bordeaux,  1904. 

Moody,  John.     The  Truth  about  the  Trusts.     New  York,  1904. 

Morse,  H.  B.     Currency  in  China.     Shanghai,  1907. 

Muhleman,  Maurice  L.  Monetary  and  Banking  Systems.  New 
York,  1908. 

Neymarck,  Alfred.  Du  Renouvellement  du  Privilege  de  la  Banque 
de  France.  Paris,  1885. 

Finances  Contemporaines.     Paris,  1902. 

Noel,  Octave.  Les  Banques  d'Emission  en  Europe  (to  be  com- 
pleted in  2  vols.).  Paris,  1888. 

Nys,  Ernest.  Recherches  sur  VHistoire  de  VEconomie  Politique. 
Brussels  and  Paris,  1898. 

Palgrave,  R.  H.  Inglis.  Bank  Rate  and  the  Money  Market  in 
England,  France,  Germany,  Holland,  and  Belgium,  1844  to  1900. 
New  York,  1903. 

Dictionary  of  Political  Economy.     London,  1894. 

Pallain,  J.     Les  Changes  Etrangers  et  les  Prix.     Paris,  1905. 

Pepper,  Charles  M.  Report  on  Trade  Conditions  in  Cuba.  Wash- 
ington, 1906. 

Pommier,  Louis.  La  Banque  de  France  et  VEtat  depuis  sa  Creation 
jusqu'a  Nos  Jours.  Paris,  1904. 

Poor,  Henry  V.  Money  and  Its  Laws :  Embracing  a  History  of 
Monetary  Theories  and  a  History  of  the  Currencies  of  the  United 
States.  New  York  and  London,  1877. 

Price,  Bonamy.     Currency  and  Banking.     New  York,  1876. 

Probyn,  I.  C.     Indian  Coinage  and  Currency.     London,  1897. 

Raffalovich,  A.  Les  M  Rhodes  Employees  par  les  Etats  au  XI  Xe 
Siecle  pour  Revenir  a  la  Bonne  Monnaie.  Paris,  1900. 

Rambaud,  Joseph.  Histoire  des  Doctrines  Economiques.  Paris 
et  Lyon,  1899. 


760  LIST  OF   AUTHORITIES. 

"Report  of  ike  Commission  Appointed  to  Inquire  into  the  Indian 

Currency,     Washington,  1893.     Sen.  Misc.  Doc.  23,  53d  Cong.% 

ist  Sess. 
Report  of  the  Monetary  Commission  of  the  Indianapolis  Convention. 

Chicago,  1898. 
Report  of  the  Royal  Commission  Appointed  to  Inquire  into  the  Recent 

Changes  in  the  Relative  Values  of  the  Precious  Metals.     Wash- 
ington, 1889.     Sen.  Misc.  Doc.  34,  5oth  Cong.,  26.  Sess. 
Report  of  the  Secretary  of  the  Treasury  on  the  Condition  of  the  Banks 

of  the   United  States  at  the  Commencement  of  the   Year  1863. 

Washington,  1863. 

Rhodes,  James  Ford.     History  of  the  United  States  from  the  Com- 
promise of  1850.     7  vols.     New  York,  1893-1906. 
Roberts,  Ellis  H.     New    York :    The   Planting   and  Growth  of  the 

Empire  State.     2  vols.     Boston  and  New  York,  1887. 
Rogers,  James  E.  Thorold.     The  First  Nine  Years  of  the  Bank  of 

England.     Oxford  and  New  York,  1887. 
Roscher,  William.     Principles    of  Political   Economy.     Translated 

by  John  J.  Lalor.     2  vols.     Chicago,  1882. 
Schurz,  Carl.     Life  of  Henry  Clay.     2  vols.     Boston,  1887. 
Seyd,  Ernest.     Bullion  and  Foreign  Exchanges,   Theoretically  and 

Practically  Considered.     London,  1868. 
Shaw,  W.  A.     The  History  of  Currency,  1252  to  1894.     New  York 

and  London,  1895. 
Shepard,  Edward  M.     Martin  Van  Buren.     Boston  and  New  York, 

1888. 
Smith,  Adam.     An   Inquiry   into   the   Nature    and   Causes    of  the 

Wealth  of  Nations.     Edited    by  James    E.   Thorold    Rogers. 

2  vols.     Oxford,  1880. 
Soetbeer,  Adolph.     Bimetallism  in  Europe.     Translated  by  F.  W. 

Taussig.     Senate   Ex.    Doc.,    No.    34,    5oth   Cong.,    ist   Sess. 

Washington,  1887. 
Statistique     Internationale     des     Banques     d'Emission.     Direction 

Generale   de   la   Statistique   du    Royaume    d'ltalie.       Rome, 

1878. 

Stevens,  John  Austin.     Albert  Gallatin.     Boston,  1894. 
Straker,  F.     The  Money  Market.     London,  1904. 
Sumner,  William  G.     A  History  of  American  Currency.     New  York, 

1884. 

Andrew  Jackson.     Boston,  1882. 

The  Financier  and  the  Finances  of  the  American  Revolution. 

2  vols.     New  York,  1891. 

Sykes,  Ernest.     Banking  and  Currency.     London,  1905. 
Taine,  Henri.     L'Ancien  Regime     Paris,  1891. 


LIST  OF  AUTHORITIES.  ;6l 

TheVy,  Edmond.     La  Grece  Actuelle  au  Point  de  Vue  £conomique  et 

Financier.     Paris,  1905. 

Situation  Economique  et  Financiere  de  Vltalie.     Paris,  1903. 

Tooke,  Thomas.     Thoughts  and  Details  of  the  High  and  Low  Prices 

of  the  Thirty  Years  from  1793  to  1822.     London,  1824. 
Turner,  B.  B.     Chronicles  of  the  Bank  of  England.     London,  1897. 
Van  den  Berg,  N.  P.     The  Money  Market  and  Paper  Currency  of 

British  India.     Batavia,  1884. 

Vignon,  Louis.     La  France  en  Algerie.     Paris,  1893. 
Viollet,  Eugene.     Le    Probleme    de    V Argent   et    VEtalon   d'Or    au 

Mexique.     Paris,  1907. 
Von  Hoist,  H.     The    Constitutional    and   Political   History   of  the 

United  States.     Translated  from  the  German  by  John  J.  Lalor. 

7  vols.     Chicago,  1877-92. 

Walker,  Francis  A.     Money.     New  York,  1891. 
Weeden,  William  B.     Economic  and  Social  History  of  New  England, 

1620-1789.     2  vols.     Boston,  1890. 

Wells,  David  A.     Recent  Economic  Changes.     New  York,  1893. 
Wharton,  Francis.     The  Revolutionary  Diplomatic  Correspondence 

of  the  United  States.     6  vols.     Washington,  1889. 
White,  Horace.     Money  and  Banking.     New  York,  1895. 
Whitney,  David  R.     The  Suffolk  Bank.     (Printed  for  private  dis- 
tribution.)    Cambridge,  Mass.,  1878. 
Wileman,  J.  P.     Brazilian  Exchange  :  The  Study  of  an  Inconvertible 

Currency.     Buenos  Aires,  1896. 
Willis,  Henry  Parker.     A   History  of  the  Latin  Monetary   Union. 

Chicago,  1901. 
Wolowski,   L.     La  Banque  d'Angleterre  et   les  Banques  d'£cosse. 

Paris,  1867. 
La  Question  des  Banques.     Paris,  1864. 


INDEX 


(The  names  of  important  banks  will  be  found  under  the  distinc- 
tive part  of  the  name  rather  than  under  the  title  "Bank.") 


Abyssinia,  Bank  of,  537 

Acceptances,  recognized  in  Federal 
Reserve  Act,  732 

Accommodation  bills,  employed 
in  Scotland,  612 

Africa,  banking  in,  535 

Africa,  Bank  of,  550 

African  Banking  Corporation,  550 

Alabama,  experiments  with  State 
banking,  380-82 

Aldrich,  Nelson  W.,  proposes  note 
issues  on  municipal  and  rail- 
way bonds,  441 ;  made  chairman 
of  Monetary  Commission,  444 

Aldrich-Vreeland  Law,  availed 
of  in  war  panic  of  1914,  745; 
amended  to  meet  new  condi- 
tions, 746;  early  cancellation 
of  notes,  750 

Algeciras,  Conference  of,  pro- 
vides for  State  Bank  of 
Morocco,  541 

Algeria,  Bank  of,  creation,  539; 
difficulties  with  loans  upon 
real  estate,  539;  revision  of 
charter,  540 

America,  Trust  Company  of, 
sustains  severe  run  in  1907, 

713 

American  Bankers'  Association, 
adopts  Baltimore  plan  of  cur- 
rency reform,  426;  appoints 
special  commission  on  cur- 
rency, 440 

Amsterdam,  Bank  of,  origin, 
287;  method  of  redemption, 
288;  failure  of,  289;  failure  to 
prevent  credit  crisis,  612 


Arbitrage  contributes  to  settle- 
ment of  French  war  indemnity, 
60 

Argentarius,  functions  of,  at 
Rome,  4 

Argentine  Republic,  early  issues 
of  paper  in,  507;  breakdown  of 
the  bond-secured  system  of 
note  issue,  508;  plan  for  restor- 
ing stable  exchange,  510;  opera- 
tion of  the  Conversion  Office, 
511;  speculation  in,  before  1890, 
663 ;  suspends  withdrawals  from 
conversion  fund  on  eve  of 
European  war,  740 

Arnaune",  Auguste,  prepares  re- 
port on  exchange  in  Indo- 
China,  608 

Arts,  demand  for  gold  in,  703 

Assets,  in  Mexico,  left  in  custody 
of  the  banks,  483;  proposed 
as  basis  of  note  issues  in 
Indianapolis  plan,  431 

Assignats,  issue  and  abandon- 
ment in  France,  43;  first  issues 
in  Russia,  252 

Assyria,  employment  of  clay 
tablets  in,  2 

Asti,  bankers  of,  lend  to  Louis 
IX.,  7 

Athens,  early  banking  in,  2 

Atkinson,  Edward,  opinion  that 
certificates  of  deposit  are  not 
subject  to  federal  tax,  413 

Australasia,  Bank  of,  548 

Australia,  banking  system  of, 
543;  expansion  of  loans  on 
landed  security,  545;  with- 
drawal of  British  deposits, 
546;  adoption  of  government 


763 


764 


INDEX 


Australia —  Continued, 

paper  issues,  547 ;  effect  of  with- 
drawal of  British  deposits  in 
1890,  666;  influence  of  the 
crisis  of  1893,  695-97 

Austria,  struggles  of,  with  paper 
money,  219-23;  efforts  to  re- 
sume specie  payments,  226-28; 
union  with  Hungary,  232; 
adoption  of  gold  standard, 
235-37;  retirement  of  paper 
money,  238;  delay  in  redemp- 
tion, 239;  adopts  crown  as 
monetary  unit,  240;  buys  silver 
for  subsidiary  coinage,  242 

Austria,  National  Bank  of, 
foundation,  224;  effect  of  specie 
suspension,  226;  attempt  to 
resume,  228;  regulations  govern- 
ing circulation,  230;  converted 
into  Austro-Hungarian  Bank, 
233;  loans  on  securities  in  1873, 

657. 

Austrian  Arch-Duke,  assassination 
of,  738 

Austro-Hungarian  Bank,  suc- 
ceeds National  Bank  of  Austria, 
233;  rules  governing  circula- 
tion, 234;  required  to  establish 
gold  payments,  237;  adopts 
new  monetary  unit,  240;  con- 
trol of  exchange  operations, 
241;  gold  and  silver  holdings, 
243;  influence  of  five  per  cent. 
tax  on  circulation,  244;  varia- 
tions of  discount  rate,  246-47; 
character  of  paper  discounted, 
247 ;  division  of  business  between 
Austria  and  Hungary,  248; 
taxation,  249;  commission  on 
separation  of  Austrian  and 
Hungarian  branches,  249 

Ayr  Bank,  based  upon  landed 
security,  146;  failure  of,  148 


B 


Bahamas,  banking  in,  532 
Baltimore  plan  for  currency  re- 
form, 426 

Bank,  origin  of  the  word,  8 

Bank  Act  of  1844,  approved  by 

Sir  Robert  Peel,   120;  purpose 

of     the     limit    on     authorized 

circulation,    121;    operation   of 


the  Act  in  1847,  I24;  failure 
to  contract  circulation,  126; 
effect  upon  use  of  credit  in- 
struments, 128;  intensifies 
crisis  of  1847,  632;  beneficial 
effects  of  suspension  of,  634; 
suspension  of  1857,  641;  sus- 
pension in  1866,  649-51;  pro- 
posed suspension  in  1890,  664 

Banking,  evolution  of  modern 
forms,  16;  origin  of,  in  Italy, 
17;  defects  of  American  sys- 
tem revealed  in  panic  of  1907, 
707 

Banking  currency,  recommended 
by  Indianapolis  Monetary 
Commission,  431 ;  not  materially 
affected  by  Act  of  1900,  432; 
plan  of  New  York  Chamber 
of  Commerce  for,  440;  provided 
for  by  Fowler  bill,  443 ;  develop- 
ment of,  in  Canada,  448 

Bank  money,  used  by  Bank  of 
Hamburg,  199;  by  Bank  of 
Amsterdam,  287 

Bank-notes,  advantages  over  coin 
in  Scotland,  161;  preferred 
to  coin  in  bank  failures,  169; 
promote  banking  in  Prussia, 
1 88;  connection  with  crisis  of 
1810,  615 

Banque  du  Peuple,  of  Montreal, 
foundation,  452;  failure  of, 
469 

Barbados,  currency  and  banking 
in,  53 J 

Baring  Brothers  &  Company, 
assist  Bank  of  England  in 
I839»  63O;  buy  French  se- 
curities in  1847,  635;  invest- 
ments in  Argentine  Republic, 
662;  failure  in  1890,  664-66; 
effect  of  failure  in  United 
States,  668 

Bavaria,  provision  for  new  bank, 
207 

Belgium,  foundation  of  Societe 
Generate,  277;  failure  of  bank- 
ing on  landed  security,  278; 
National  Bank  of,  279;  bank- 
ing experience  in  Franco- 
Prussian  War,  280;  proposes 
Latin  Union,  281;  losses  in 
Russian  enterprises,  705 

Belgium,      National     Bank     of, 


INDEX 


765 


Belgium,  National  Bank — Con'd 
charter  in  1850,  278;  difficult 
position  during  Franco-Prus- 
sian War,  279-80;  influence 
of  socialism  upon  charter  of 
1900,  284;  changes  in  discount 
rate,  285;  annual  statistics, 
286 

Biddle,  Nicholas,  becomes  presi- 
dent of  Bank  of  the  United 
States,  349;  opposes  bringing 
the  bank  into  politics,  352; 
dies  insolvent,  355;  operations 
in  cotton,  628 

Bilinski,  Count  von,  concludes 
arrangement  to  regulate  for- 
eign exchange,  241;  opinion 
on  Austrian  note  system,  244 

Bills  of  exchange,  employed  by 
Jews  to  evade  usury  laws,  15; 
admitted  to  German  bank 
reserve,  217;  holdings  in  re- 
serve of  National  Bank  of 
Belgium,  280;  abuse  of,  in 
Scotland,  612 

Black  Friday  in  England,  649 

Bland-Allison  Act,  421;  causes 
withdrawal  of  foreign  capital, 
670,  note;  offered  as  substitute 
for  Sherman  law,  685 

Bolivia,   banking  system  of,   525 

Bombay,  Bank  of,  573-74 

Bonaparte,  Napoleon,  decree  for 
a  national  bank,  45 ;  reorganizes 
Bank  of  France,  46;  effects 
of  abdication,  47;  effect  of 
Berlin  decree  on  trade,  614; 
disasters  in  Russia,  616 

Bonds,  made  basis  of  national 
bank  circulation,  407;  issue  for 
Panama  Canal,  434;  abandoned 
as  security  for  note  issues  in 
Japan,  557;  issues  of  1894,  688; 
syndicate  contract  of  1895,  690- 
93;  issues  of  1896,  694;  issues 
in  South  African  and  Japanese 
wars,  699;  effect  of  Panama 
issues  in  crisis  of  1907,  719; 
disposition  of,  under  Federal 
Reserve  Law,  729 

Boston,  early  banking  institu- 
tions of,  360;  competition  of 
country  banks,  365;  Suffolk 
redemption  system,  366;  con- 
duct in  1 86 1,  390 


Bourse  of  Paris,  38,  note 

Branch  banking,  of  Scotch  banks 
in  England,  158;  benefits  to 
Scotch  industry,  164;  success 
of  Hungarian  over  Austrian 
branches,  248;  branches  of 
Bank  of  the  United  States, 
338;  extent  of,  in  Canada,  473; 
success  of,  in  Canada,  477 

Branch  drafts  issued  by  Bank  of 
the  United  States,  349 

Brazil,  relation  of  banking  history 
to  theories  of  money,  499; 
comparative  stability  of  paper 
issues,  500;  decline  of  exchange 
after  1890,  501;  vicissitudes  of 
national  bank,  502;  Roths- 
childs' funded  loan,  503;  crea- 
tion of  Conversion  Office,  505; 
adopts  moratorium  on  eve  of 
European  war,  740 

British  Guiana,  banking  in, 
53.2 

British    Honduras,    banking    in, 

533 

British  India,  early  banking  his- 
tory of,  573;  issue  of  currency 
notes,  574;  recent  banking 
expansion,  576;  appointment  of 
currency  commission  of  1893, 
577;  closing  of  mints  to  silver 
coinage,  578;  adoption  of  ex- 
change standard,  579;  pur- 
chases of  silver  for  coinage, 
581;  affected  by  crisis  of  1907, 
583;  influence  of  crop  failures 
of  1908,  584 

British  Linen  Company,  146 

British  West  Indies,  banking  in, 
530-3.2 

Brunswick,  Bank  of,  resists 
Imperial  banking  policy,  206 

Bryan,  William  Jennings,  nomi- 
nated for  President,  429 

Buda-Pesth,  gains  over  Vienna 
branch  of  Austro-Hungarian 
Bank,  248 

Bulgaria,  National  Bank  of, 
323 

Bullion  Report,  results  from 
motion  by  Mr.  Homer,  104; 
the  facts  proved,  106;  features 
of  report,  107-109 

Burr,  Aaron,  secures  charter  of 
Manhattan  Company,  370 


766 


INDEX 


Caisse  <T  Escompte  du  Commerce, 
established  in  France,  40; 
embarrassed  by  demands  of 
Calonne  and  Necker,  42;  re- 
established in  1797,  44;  ab- 
sorbed by  Bank  of  France,  46 

Caisse  des  Comptes  Courants 
established  in  1796,  44 

Caisse  des  Emprunts,  creation  in 

1674, 13 

Calonne,  Charles  Alexandre  de, 
diverts  Caisse  d'  Escompte  to 
public  uses,  42 

Canada,  moratorium  authorized  on 
eve  of  war,  739 ;  gold  shipments 
to,  during  European  war,  745 

Canadian  Bankers'  Association, 
increase  in  powers  of,  474 

Canadian  banking,  early  history, 
448-53;  proposals  for  secured 
circulation,  455;  mania  for 
free  banking,  456;  issue  of 
Dominion  notes,  457;  efforts 
for  secured  circulation,  458; 
extension  of  charters  in  1870, 
459;  advantages  of  recent 
legislation,  461;  security  of 
note  issues,  461-62;  elasticity, 
463-64 ;  redemption  agencies, 
465;  methods  of  examination, 
466-67;  limited  number  of 
failures,  467-71;  reserves  main- 
tained, 472;  large  capital  and 
branches,  472-73;  reforms  of 
1900,  474-75;  insufficiency  of 
note  issues  in  1907,  476; 
emergency  issues  authorized 
by  Act  of  1908,  477;  statistics, 

479 

Canals,  development  in  England, 
612;  Erie  Canal,  624;  Suez 
Canal,  654 

Capital,  attracted  to  Argentine 
Republic  by  stable  exchange, 
511;  British,  invested  in  co- 
lonial banks,  536;  British, 
withdrawn  from  Australia,  546; 
withdrawn  from  United  States 
in  1893,  670;  demand  for, 
after  1893,  700;  amount  in 
securities  in  United  States, 
702;  converted  into  fixed  forms 
by  State  banks,  707 


Carlisle,  John  G.,  proposes  new 
banking  system,  426;  esti- 
mates profit  on  lost  notes,  428 

Casasus,  Joaquin  D.,  condemns 
American  plan  of  note  issue, 
481;  defines  methods  of  dis- 
count in  Mexico,  484;  favors 
creation  of  exchange  fund,  492 

Cash  credits,  creation  by  Royal 
Bank  of  Scotland,  166;  ad- 
vantages to  Scotch  industry, 
168 

Central  bank  recommended  by 
New  York  Chamber  of  Com- 
merce committee,  438 

Chamberlain,  Hugh,  plan  for 
Land  Bank,  84 

Chartered  Bank  of  India,  Aus- 
tralia, and  China,  592 

Chase,  Salmon  P.,  conference 
with  New  York  bankers,  397; 
interpretation  of  Act  of  1861, 
398;  issues  demand  notes,  399- 
400;  relies  upon  loans,  403; 
recommends  banking  system, 
405;  purpose  to  pay  bank-notes 
in  specie,  409;  recommends 
taxation  of  State  notes,  411 

Cheque  Bank,  established  in 
London,  128 

Cheque  system  extended  by 
Imperial  Bank  of  Germany, 
216 

Chile,  early  banking  history  of, 
512;  excessive  issues  of  legal - 
tender  paper,  513;  efforts  to 
restore  stable  exchange,  515 

China,  payment  of  war  indemnity 
to  Japan,  560;  early  banking 
history  of,  596;  methods  of 
private  bankers,  597;  foreign 
trade  affected  by  fluctuations 
in  silver,  598;  agrees  to  uniform 
currency,  599;  relations  with 
Commission  on  International 
Exchange,  600;  receives  Pro- 
fessor Jenks,  601;  creates 
Imperial  Bank,  602 ;  aids  Russo- 
Chinese  Bank,  603 

Circulation,  regulations  govern- 
ing, in  Italy,  18,  20,  23,  25,  29; 
France,  55,  66;  England,  93, 
113,  116,  118,  119,  121,  123; 
Scotland,  149,  163;  Prussia, 
189;  Germany,  193,  203-205, 


INDEX 


767 


Circulation —  Continued 

210;  Austria,  224,  230,  233, 
244;  Russia,  261,  267;  Finland, 
274;  the  Netherlands,  291; 
Sweden,  294;  Norway, 
297;  Switzerland,  303,  310; 
Spain,  313,  318;  first  Bank  of 
the  United  States,  337;  second 
Bank  of  the  United  States,  349 ; 
Massachusetts,  360-^62 ;  New 
York,  371-74;  Michigan,  376; 
Louisiana,  385;  Wisconsin,  389; 
under  national  banking  system 
in  United  States,  407,  414,  417; 
Canada,  455~57,  459,  461-63; 
Mexico,  483-84;  Brazil,  502, 
505;  Argentina,  507,  510; 
Chile,  512,  515;  Uruguay,  516; 
Paraguay,  519;  Bolivia,  525; 
Guatemala,  528;  Egypt,  538; 
Algeria,  540;  Morocco,  541 ;  Per- 
sia, 542;  Australia,  543,  547; 
South  Africa,  549;  French 
Colonies,  551;  Japan,  556,  559; 
Korea,  568;  British  India,  574 

City  of  Glasgow  Bank,  suspension 
in  1857,  153;  failure  in  1878, 
154;  effect  upon  unlimited 
liability,  155 

Clay,  Henry,  denies  power  of 
Congress  to  create  a  bank, 
341;  supports  second  Bank 
of  the  United  States,  351-52; 
resolution  to  censure  Jackson, 

354 

Clearing  House  Certificates,  issues 
in  United  States,  646;  effect 
of  issues  in  1884,  662;  issues 
in  1893,  681;  in  1907,  714;  in 
1914,  750 

Clearing  House  Committee,  re- 
quires reserves  by  New  York 
trust  companies,  708;  drastic 
action  in  the  crisis  of  1907,  713 

Cleveland,  Grover,  recommends 
currency  reform,  426;  efforts 
to  repeal  Sherman  law,  678; 
summons  extra  session  of  Con- 
gress, 679;  opposes  silver  com- 
promise, 686;  recommends  re- 
tirement of  legal-tender  notes, 
689;  announces  syndicate  con- 
tract, 690;  again  recommends 
retirement  of  legal-tender  notes, 
693 


Cochin-China,  provided  with 
banking  facilities  by  Bank  of 
Indo-China,  605 

Colombia,  banking  in,  522 

Colonial  Bank,  creation  of^  531; 
resources  of,  532 

Colonial  banks  of  Great  Britain, 
536 

Commercial  paper,  made  avail- 
able to  secure  circulation  under 
Aldrich-Vreeland  Act,  444;  'de- 
fined in  plan  of  National  Mone- 
tary ^  Commission,  447;  made 
basis  of  rediscounts  under 
Federal  Reserve  Act,  727 

Commission  on  International 
Exchange.  See  International 
Exchange,  Commission  on 

Compagnie  des  Indes,  develops 
from  bank  of  John  Law,  36; 
fall  of  the  stock  and  read- 
justment of  property,  39-40 

Connecticut,  bank  notes  affected 
by  depreciated  foreign  paper, 

365 

Consols,  origin  of,  92,  note; 
effect  of  conversion  in  1825, 
619-20;  conversion  in  1888, 
662;  decline  of,  in  1901  and 
1907,  699 

Constantinople,  banking  methods 
in,  6 

Conversion  Office,  established  in 
Brazil,  505;  established  in 
Argentine  Republic,  510 

Cooke  &  Co.,  Jay,  failure  of,  655 

Copper,  fall  in  price  invokes 
panic  of  1907,  568 

Cortelyou,  George  B.,  deposits 
public  funds  in  national  banks 
in  1907,  714;  offers  Panama 
bonds  and  Treasury  certificates, 
719 

Costa  Rica,  banking  in,  527 

Cotton,  subject  of  Biddle's  opera- 
tions, '628;  new  markets  opened 
in  1 86 1,  645;  formation  of  pool 
to  promote  movement  during 
European  war,  748 

Council  drafts  on  India,  offered 
in  London,  578;  rise  close  to 
par,  579;  fail  to  find  purchasers 
in  1908,  583 

Crawford,  William  H.,  supports 
Bank  of  the  United  States,  341 


INDEX 


Credit,  dates  back  to  antiquity, 
i ;  employment  of  clay  tablets 
as  credit  instruments  in  Assyria, 
2;  unduly  developed  in  United 
States  in  1907  by  State  banking 
institutions,  707;  efforts  of 
Secretary  Cortelyou  to  support, 
by  Treasury  measures  of  relief, 
719 

Credit  Lyonnais,  deposits  of,   75 

Creel,  Enrique  C.,  member  of 
Commission  on  International 
Exchange,  488;  favors  creation 
of  exchange  fund,  492 

Crimean  War,  effect  on  com- 
merce, 639,  642 

Crises,  early  history  of,  611; 
crisis  of  1873,  613-14;  of  1810, 
614-16;  of  1814-19,  616-19; 
of  1825,  619-23;  of  1837-39, 
623-31;  of  1847,  631-35;  of 
1857,  636-43;  of  1864-66, 
643-52;  of  1873-79,  653-58; 
of  1882-84,  658-62;  of  1890, 
662-67;  of  1893,  668-98;  of 
1907,698-721 

Cromer,  Lord,  economic  reforms 
of,  536 

Cuba,  banking  history  of,  525; 
proposals  for  monetary  reform, 
526 

Currency  associations,  authorized 
by  Aldrich-Vreeland  law,  444; 
put  in  successful  operation  in 

I9H,745    . 

Currency  principle,  adopted  by 
Sir  Robert  Peel,  120;  ignores 
use  of  credit,  122;  failure  of,  in 
crisis  of  1844,  124;  connection 
with  convertibility  of  notes, 
127;  advocated  in  Canada, 
454-55 


D 


Dallas,  Alexander  J.,  plan  for  a 
national  bank,  342 

Darien  Company,  competition 
with  Bank  of  Scotland,  143 

Delaware,  banking  in,  385 

Demand  notes,  issued  by  Secre- 
tary Chase,  399;  cause  specie 
suspension,  400 

Denmark,  National  Bank  of, 
origin  of,  299;  character  of 


operations,  300;  share  in  avert- 
ing panic  in  1908,  300 

Departmental  banks  in  France, 
foundation,  47;  suspension  of 
specie  payments,  51;  fusion 
with  Bank  of  France,  52;  re- 
striction on  issues,  52 

Discount  rate,  method  of  deter- 
mining at  Bank  of  France, 
65;  system  of  rapid  changes 
adopted  by  Bank  of  England, 
129;  at  Imperial  Bank  of 
Germany,  212-13;  at  Austro- 
Hungarian  Bank,  246-47 ; 
changes  at  Bank  of  Russia 
during  war  with  Japan,  271; 
changes  at  Bank  of  Belgium, 
285;  changes  at  Bank  of  the 
Netherlands,  292;  changes  in 
Switzerland,  312;  injurious 
effect  of  low  rate  in  Spain, 
314;  change  of  policy  in  Spain, 
318;  at  National  Bank  of 
Servia,  325;  in  Mexico,  484; 
advances  of,  in  1907,  716;  gen- 
erally advanced  on  threat  of 
European  war  in  1914,  739 

Dominion  notes,  issue  authorized 
in  Canada,  457;  required  to 
be  kept  in  bank  reserves,  459; 
may  be  demanded  at  banks 
463;  issued  in  emergency  of 
1907,  476 

Doumer,  Paul,  Governor  of  Indo- 
China,  prepares  plan  for  stable 
exchange,  608 

Dutch  East  India  Company, 
borrows  from  Bank  of  Amster- 
dam, 289 


E 


Eckels,  James  H.,  modifies  sys- 
tem of  bank  examinations,  432 

Ecuador,  banking  system  of, 
524;  adopts  gold  exchange 
standard,  524 

Egypt,  National  Bank  of,  founda- 
tion of,  536;  conduct  in  crisis 
of  1907,  537;  basis  of  note 
issue,  538 

Elasticity,  fluctuations  with  the 
seasons  in  Scotland,  160;  un- 
der Canadian  system,  463-64; 


INDEJL 


769 


Elasticity — Continued 

provided  by  Federal    Reserve 
Act,  727 

England,  economic  position  of, 
in  1697,  87;  control  of  inter- 
national banking,  536;  legisla- 
tion against  stock- jobbing,  611; 
accommodation  bills,  612; 
contraband  trade  with  Ger- 
many, 615;  speculation  after 
fall  of  Napoleon,  617;  scarcity 
of  cereals  in  1818,  618;  specula- 
tion in  1825,  620;  railway 
extension,  632;  absorption  of 
capital  in  1857,  637;  joint- 
stock  companies  in  1864,  646; 
distrust  of  British  credit  abroad, 
652;  crisis  of  1875,  658;  loans 
in  Argentine  Republic,  662; 
cost  to,  of  war  in  South  Africa, 
699;  guarantees  discounts  at 
the  Bank  during  European 
war,  751 

England,  Bank  of,  exchanges 
gold  for  silver  with  Bank  of 
France,  67;  conditions  of  crea- 
tion, 78-81;  Paterson's  plan, 
81;  political  dangers,  84;  fi- 
nancial dangers,  86-90;  monop- 
oly of  note  issues,  93;  suspen- 
sion of  specie  payments,  95-98; 
effect  of  specie  suspension,  101; 
bullion  report,  106-109;  resolu- 
tion of  Mr.  Vansittart,  no; 
resumption  of  cash  payments, 
114;  monopoly  of  note  issues 
modified,  116;  adoption  of 
currency  principle,  120;  failure 
of  currency  principle,  124; 
changes  in  discount  rate,  129; 
the  "one  reserve  system,"  131; 
plans  for  increasing  reserves, 
J35;  policy  as  to  discount 
rates,  137;  organization,  139; 
dividends,  140;  annual  sta- 
tistics, 141;  increase  of  dis- 
counts in  1810,  615;  policy 
in  the  crisis  of  1825,  621; 
issue  of  £i  notes,  622;  sup- 
ported by  the  Barings  in 
l839»  63°5  suspension  of  Bank 
Act  in  1847,  634J  suspension 
of  Bank  Act  in  1857,  641; 
suspension  of  Bank  Act  in 
1866,  649-51;  distrust  of  bank 


abroad,  652;  well  equipped  in 
1875,  658;  management  in 
crisis  of  1890,  664-65;  raises 
discount  rate  in  1907,  716; 
raises  discount  rate  under  pres- 
sure of  European  war  panic, 
739;  authorized  to  issue  small 
notes,  742;  arranges  for  gold 
deposits  at  Ottawa,  747 ;  success 
of  rediscount  during  European 
war,  750 

Examination  of  banks,  method 
under  national  banking  law, 
423 ;  in  Canada,  466 

Exchange,  employed  to  evade 
usury  laws,  15 

Exchange,  Foreign.  See  Foreign 
Exchange 

Exchequer  bills,  effect  of  issue  in 
1793,  614;  issue  of  1811,  616 


Falkland  Islands,  temporary 
paper  currency  in,  531 

Farmers  General,  functions  in 
France,  12 

Federal  Reserve  Act,  genesis  of, 
722;  purpose  of,  723;  provisions 
of,  724-32;  divisions  of  dis- 
tricts under,  734 

Federal  Reserve  Banks,  capital 
of,  724;  authority  to  rediscount, 
727;  power  of  note  issue,  728; 
reserves  of,  730;  distribution 
by  districts,  734 

Federal  Reserve  Board,  authority 
of,  724;  membership  of,  725; 
powers  of,  726;  power  to  fix 
rate  on  note  issues,  728;  as- 
sumes leadership  in  the  war 
panic,  748 

Finland,  Bank  of,  origin,  273; 
present  organization,  274 

First  Bank  of  Japan,  provides 
note  circulation  in  Korea,  568 

Florida,  state  banking  in,  383-84 

Foreign  Exchange,  policy  of 
Bank  of  France,  65;  policy  of 
Bank  of  Germany,  217;  con- 
trol of,  assumed  by  Austro- 
Hungarian  Bank,  241;  policy 
of  Russia  in  1893,  263;  policy 
of  National  Bank  of  Belgium, 
280;  adverse  conditions  in 


INDEX 


Foreign  Exchange — Continued 
Switzerland,  306;  method  to 
regulate,  adopted  in  Spain, 
317;  policy  of  National  Bank 
of  Roumania,  322;  fluctuations 
in  Greece,  330;  disturbed  in 
Mexico  by  fluctuations  in 
silver,  486;  efforts  to  bring 
about  stability,  487;  influence 
upon  gold  resources  of  Mexico, 
494;  reasons  for  stability  in 
Brazil  prior  to  1888,  500; 
rapid  decline  under  Brazilian 
paper  issues,  501 ;  improvement 
in  Brazil  under  contraction  of 
paper,  504;  given  stability  in 
Argentine  Republic,  511;  fluc- 
tuations in  Chile,  515;  employed 
to  bring  gold  into  Japan,  561; 
fluctuations  of,  in  the  Orient, 
569;  relation  to  gold  standard 
in  Java,  571;  unfavorable 
conditions  of,  in  British  India, 
577;  dominating  influence  in 
Oriental  banking,  591 ;  specula- 
tion in,  at  Singapore,  594; 
methods  of,  in  China,  598; 
proposals  to  secure  stability  of, 
599;  disturbance  of,  in  Siam, 
604;  plans  for  stability  of,  in 
Indo-China,  608;  efforts  to 
control,  by  syndicate  contract 
of  1895,  691;  defects  of  syndi- 
cate arrangement,  692;  turns 
in  favor  of  New  York,  715; 
thrown  into  confusion  by  Eu- 
ropean war,  740;  deadlock 
broken  by  arrangement  between 
government  of  France  and  J.  P. 
Morgan  &  Co.,  747 

Formosa,  provided  with  circula- 
tion by  Bank  of  Taiwan,  566 

Fowler,  Charles  N.,  reports  cur- 
rency plan,  441;  proposes 
currency  commission,  446 

France,  early  banking  in,  12; 
invaded  by  Italian  subsidiary 
coin,  26;  origin  of  banking  in, 
32;  the  Mississippi  Company 
and  the  plans  of  John  Law, 
33-39;  collapse  of  Law's  sys- 
tem, 40;  banking  before  the 
Revolution,  40-43;  issue  of 
the  assignats,  43;  the  Caisse 
des  Comptes  Courants  and  Caisse 


d"  Escompte,  44;  foundation  of 
Bank  of  France,  46;  the  in- 
dependent departmental  banks, 
48-52;  effects  of  the  double 
standard,  61 ;  functions  of  Bank 
of  France,  69-71;  commercial 
interests  of,  in  Algeria,  540; 
collapse  of  credit  in  1805,  614; 
effects  of  Napoleon's  fall,  616; 
abuse  of  credit  in  1837,  630; 
condition  in  1847,  635;  benefits 
of  gold  discoveries,  644;  craze 
for  stock  companies,  647; 
speculation  in  securities,  659 

France,  Bank  of,  foundation,  45; 
reorganization  of,  by  Napoleon, 
46;  resistance  to  monopoly 
of,  50;  suspension  of  specie  pay- 
ments by,  in  1848,  51;  assists 
railway  enterprises,  53;  con- 
dition influenced  by  war,  with 
Germany,  54;  threatened  by 
the  Commune,  55;  assists  in 
paying  war  indemnity,  56-59; 
embarrassed  by  variations 
between  gold  and  silver,  60; 
contest  over  renewal  of  charter, 
67;  ownership  and  organiza- 
tion, 68;  relation  of  discounts 
to  note  issues,  70;  influences 
affecting  discount  policy,  72; 
changes  in  gold  and  silver 
stock,  73;  policy  in  buying 
gold,  75;  taxes  paid  to  govern- 
ment, 76;  number  of  branches, 
77;  aids  London  market,  136; 
dangerous  position  of,  in  1805, 
614;  expansion  of  discounts  in 
1810,  615;  fall  of  metallic  re- 
serve in  1818,  619;  strong  posi- 
tion in  1825,  623;  loans  to  Bank 
of  England  in  1839,  630;  pur- 
chases of  gold  in  1847,  635; 
losses  of  gold  in  1857,  642; 
unable  to  aid  American  market 
in  1907,  716;  raises  discount 
rate  under  pressure  of  European 
war  panic,  739;  authorized  to 
issue  small  notes,  741;  gold 
holdings  on  eve  of  war,  743; 
extension  of  discounts  during 
war,  753 

Franco-Prussian  War,  effect  on 
Bank  of  France,  54-59;  effect 
on  National  Bank  of  Belgium, 


INDEX 


771 


Franco-Prussian  War — Continued 
279-91;  cost  of,  653;  effect  on 
Germany,  654;  effect  on  Bank 
of  England,  657;  effect  on 
France,  659 

Frederiksen,  on  evils  of  depre- 
ciated Swedish  notes,  273 

Free  banking,  illustrated  by 
Swiss  system,  304;  under  free 
banking  law  of  New  York, 
374;  issues  by  individuals,  375; 
similar  laws  adopted  in  Western 
States,  377;  failure  in  Wisconsin, 

389 
Freeholders'  Bank,  suspension  in 

1908,  300 
French     Revolution,     effect     on 

banking  in  Italy,  17;  on  credit 

in  France,  43;  upon  Bank  of 

England,  95-98 
French  West  Africa,  banking  in, 

55i 

Fuggers,  origin  of  the  House,  1 1 ; 
operations  in  South  America, 

12 


G 


Gallatin,  Albert,  supports  Bank 
of  the  United  States,  340; 
opinion  of  specie  suspension, 

341  " 

Geneva,  Bank  of,  302 

Genoa,  origin  of  Bank  of  St. 
George  at,  10 

Genoa,  Bank  of,  origin  and 
political  power,  17;  unites  with 
National  Bank  of  Sardinia,  18 

Germany,  exacts  war  indemnity 
from  France,  56-59;  banks  of 
Prussia,  186-90;  banks  of  the 
German  states,  190-93;  cen- 
tralizing policy  of  Prussia, 
195-96;  adoption  of  gold  stand- 
ard, 197-98;  Bank  of  Hamburg, 
199;  unification  of  banking 
system,  200-201;  the  Imperial 
Bank,  202-205;  regulation  of 
local  banks,  205-209 ;  cost  of  war 
with  France,  653;  effects  of 
war  indemnity,  654;  speculation 
in  1873,  657;  failure  of  mortgage 
banks  in,  705;  losses  in  stock 
companies,  706 

Germany,     Imperial     Bank     of, 


succeeds  Royal  Bank  of  Prussia, 
200;  character  of  organization, 
20 1 ;  rules  governing  circulation, 
203-04;  annual  accounts,  208; 
note  issues  under  five  per  cent, 
tax,  209-10;  changes  in  dis- 
count rate,  213;  status  of  gold 
reserve,  214;  taxation,  215; 
extends  cheque  system,  216; 
the  charter  revision  of  1909, 
217;  raises  discount  rate  under 
pressure  of  European  war  panic, 
739;  authorized  to  suspend 
circulation  tax,  742;  gold  hold- 
ings on  eve  of  European  war, 
743;  extension  of  discounts 
during  war,  753 

Glass,  Carter,  prepares  draft  of 
Federal  Reserve  Act,  722 

Godfrey,  Michael,  share  in  organ- 
izing Bank  of  England  81 ; 
describes  business  of  the  bank, 

83 

Gold,  variation  from  coinage 
ratio  in  France,  60;  increase 
of,  at  Bank  of  France,  72; 
relation  to  paper  in  England, 
102;  relation  to  prices,  106; 
favored  as  standard  by  German 
cities,  197;  adopted  as  standard 
in  Germany,  198;  proportion 
held  by  German  Bank,  214; 
recommended  as  standard  in 
Austria,  235 ;  importations  into 
Austria,  238;  proportion  in 
Austro-Hungarian  Bank,  242- 
43;  accumulation  in  Russia  in 
1895,  261;  adopted  as  standard 
in  Russia,  265;  maintenance  of, 
as  standard  in  Holland,  291; 
exchanges  for  paper  at  Bank 
of  the  Netherlands,  292;  in- 
dorsed as  standard  by  Repub- 
lican convention  of  1896,  429; 
made  standard  in  United  States, 
432;  method  of  maintaining, 
as  standard  in  Java,  447; 
established  as  standard  in 
Mexico,  491 ;  heavy  impor- 
tations into  Mexico  in  1906, 
495;  accumulation  in  Brazilian 
Conversion  Office,  506;  in 
Conversion  Office  of  the  Argen- 
tine Republic,  511;  in  Chile, 
515;  maintained  as  standard 


772 


INDEX 


Gold —  Continued, 

in  Uruguay,  518;  required  as 
reserve  in  Paraguay,  519;  chief 
medium  of  circulation  in  Aus- 
tralia, 544;  adopted  as  standard 
in  Japan,  561 ;  exports  from 
Japan  from  1898  to  1900,  564; 
adopted  as  standard  in  Korea, 
568;  ratio  to  silver  in  India, 
577;  made  legal  tender  in 
India,  579;  accumulations  of, 
in  Indian  gold  standard  re- 
serve, 582;  original  standard 
in  Philippines,  585;  accepted 
for  certificates  in  Philippines, 
589;  proposed  as  standard  in 
China,  600;  withdrawals  from 
England  in  1818,  618;  new 
coinage  policy  in  United 
States,  626;  effect  of  opening 
American  mines,  637;  dis- 
appearance of,  in  France  in 
1857,  642;  benefits  of  new 
supplies  in  France,  644;  pro- 
duction of,  from  1903  to  1907, 
703;  effect  of  increase  of,  on 
prices,  704;  imports  at  New 
York  in  1907,  715;  returns 
rapidly  to  banks  after  panic 
of  1907,  720;  replaced  by  small 
notes  during  European  war, 
740-42;  stock  in  United  States 
on  eve  of  European  War,  744; 
increase  of,  at  Bank  of  England, 
during  war,  752 


H 


Haiti,  banking  in,  529 
Hamburg,    establishment   of   the 

Public  Bank,  8 
Hamburg,  Bank  of,  history  and 

liquidation,      199;     failure     to 

prevent    crisis    of    1763,    612; 

failure    to    prevent    crisis    of 

1 857,  643 
Hamilton,    Alexander,    plan    for 

Bank    of    the    United    States, 

336;  change  of  views  regarding 

landed     security,     337,     note; 

draws  charter  of  Bank  of  New 

York,  370 
Hepburn,    A.    Barton,   views   on 

Spanish    War,    431;    chairman 


of  special  commission  on  the 
currency,  440 

Hochstetters,  origin  and  opera- 
tions of,  12 

Holden,  E.  H.,  proposed  plan  for 
strengthening  Bank  of  England 
reserve,  135 

Holland,  banking  in,  287;  Bank 
of  Amsterdam,  287-89;  Bank 
of  the  Netherlands,  290-93;  in- 
vestments in  American  securi- 
ties, 293,  note;  reduces  reserve 
requirements,  741 

Honduras,  banking  in,  529 

Hong-kong,  banking  in,  590; 
discussion  of  gold  standard 
for,  595 

Hong-kong  and  Shanghai  Bank- 
ing Corporation,  branch  in 
Manila,  590;  dominating  force 
in  the  Orient,  591;  introduces 
European  methods  in  China, 
597;  does  business  in  Siam,  604 

Homer,  Francis,  moves  for  an 
inquiry  regarding  currency  and 
exchanges  in  England,  104; 
prepares  Bullion  Report,  105; 
resolutions  defeated  in  Parlia- 
ment, no 

Houblon,  Sir  John,  first  Governor 
of  Bank  of  England,  82;  stays 
a  panic,  86 

Hungary,  demands  payments 
from  National  Bank  of  Austria, 
232;  relations  with  Austro- 
Hungarian  Bank,  233;  adop- 
tion of  gold  standard,  235; 
demand  for  a  separate  bank,  249 


Illinois,  failure  of  State  banks 
in,  384-85 

Imperial  Bank  of  China,  created 
in  1904,  601 

Imperial  Ottoman  Bank,  origin 
off  33 1;  policy  in  crisis  of  1894, 
332;  policy  in  1907,  333 

Indemnity  of  France  to  Ger- 
many, share  of  Bank  of  France 
in  its  payment,  56-58;  effect 
on  securities,  59-60 

Independent  Treasury  system, 
outgrowth  of  conflict  over 
Bank  of  the  United  States, 


INDEX 


773 


Independent  Treasury — Confd 
356;    modified    in    1861,    397; 
fails  to  prevent  specie  suspen- 
sion, 401 

Indiana,  success  of  State  Bank 
of,  386;  attitude  after  specie 
suspension  in  1861,  387 

Indianapolis  Monetary  Commis- 
sion, origin  of,  430;  character 
of  report  of,  431;  results  in 
action  by  Congress,  432 

Indo-China,  banking  in,  605; 
success  of  Bank  of,  606 ;  failure 
of  attempt  to  introduce  French 
monetary  system,  607;  plans 
for  stable  exchange,  608;  criti- 
cisms of  French  economists,  609 

Interest,  theories  regarding  legiti- 
macy of,  14;  allowance  on 
deposits  benefits  Scotch  people, 
163-66;  paid  on  notes  of 
suspended  banks  in  Canada, 
462 

International  American  Confer- 
ence seeks  stable  monetary 
conditions  in  Latin  America, 

499 

International  Banking  Corpora- 
tion, establishes  branches  in 
Panama,  524;  does  business 
in  Philippines,  590 

International  Exchange,  Com- 
mission on,  appointed  by  United 
States  at  request  of  Mexico, 
488;  objects  sought  by,  489; 
agreement  with  Indian  Govern- 
ment in  regard  to  purchase  of 
silver,  58 1 ;  relation  to  stable 
exchange  in  China,  599;  work 
of  Professor  Jenks  in  China,  60 1 

Ireland,  depreciation  of  currency 
in,  considered  by  Parliamentary 
committee,  107;  economic 
conditions  in,  171 ;  early  private 
banks  in,  172-76;  foundation 
of  Bank  of  Ireland,  175;  sus- 
pension of  cash  payments,  176; 
the  Provincial  Bank,  178; 
National  Bank,  .179;  Tipperary 
Bank,  181;  Banking  Act  of 
1845,  182;  elasticity  of  note 
issue,  184 

Ireland,  Bank  of,  foundation, 
175;  monopoly  of  banking,  177; 
circulation  of,  184 


Italy,  early  banking  history  of, 
17;  National  Bank  of  the 
Kingdom,  18;  policy  of  unity 
in  banking,  19;  official  corrup- 
tion in  1893,  22;  flight  of 
subsidiary  money,  26;  improve- 
ment in  economic  conditions, 
29;  feels  crisis  of  1893,  669 

Italy,  National  Bank  of,  created 
by  Victor  Emmanuel,  19;  issue 
of  illegal  circulation,  22;  ab- 
sorbs National  Bank  of  Tuscany 
and  Tuscan  Bank  of  Credit, 
23;  new  organization  in  1893, 
24 ;  relations  with  Roman  Bank, 
27;  reduces  unliquidated  assets 
29;  statutes  of  1900, 30;  balance- 
sheet  of,  31 


J 


Jackson,  Andrew,  criticises  Bank 
of  the  United  States,  349; 
determines  to  suspend  deposits 
in  bank,  353;  protests  against 
Senate  resolutions,  354;  issues 
specie  circular,  625 

Jamaica,  banking  in,  532 

James  L,  policy  in  raising  taxes,  80 

Jannet,  Claudio,  views  regarding 
mediaeval  banking,  6 

Japan,  early  banking  history  of, 
555-56;  creation  of  Bank  of 
Japan,  557;  retirement  of  old 
notes  by  Bank  of  Japan,  559; 
appoints  commission  on  mone- 
tary reform,  560;  devotes 
Chinese  indemnity  money  to 
provisions  for  gold  standard, 
561;  character  of  the  mone- 
tary reform,  562;  effect  on 
trade  with  silver  countries, 
563;  monetary  system  tested 
in  war  with  Russia,  564; 
energetic  action  to  retain  gold, 
565;  statistical  progress  of 
Bank  of  Japan,  566;  monetary 
system  adopted  in  Formosa, 
567 ;  authorizes  note  circulation 
in  Korea,  568 ;  cost  of  war  with 
Russia,  700 

Java,  banking  system  of,  571; 
course  of  exchange  in,  572 

Jefferson,  Thomas,  policy  towards 
Bank  of  the  United  States,  339 


774 


INDEX 


Jenks,  Jeremiah  W.f  special  mis- 
sion to  China,  60 1 

Jews,  rivalry  with  Lombards  in 
Italy,  7;  why  drawn  to  the 
trad'e  in  money,  14 

Joint-stock  banks,  discovered  to 
be  legal  in  England,  115;  first 
bank  established  in  London, 
117;  lack  of  coin  reserve,  130; 
increase  of  deposits  at  Bank  of 
England  during  European  war, 

753 

Joint-stock  companies,  effect^  on 
production,  606,  note;  variety 
of  objects  in  England  in  1825, 
620;  expansion  in  England  in 
1834,  629;  effect  of  Limited 
Companies'  Act,  646;  expansion 
in  France,  647;  development 
in  France  up  to  1882,  659; 
expansion  in  England  up  to 
1890,  662;  in  United  States  in 
1905,  702 


Kentucky,    banking    in,    378-80 
King,    Lord,    issues    circular    to 

tenants  requiring  payments  in 

coin,  ill 
Knickerbocker    Trust    Company 

suspends  payment  in  1907,  713 
Koch,   Dr.,   resigns   governorship 

of    Bank    of    Germany,    212; 

views  on  redemption  of  notes, 

214;   policy   in   buying  foreign 

bills,  217 
Korea,  monetary  reform  enforced 

by  Japan,  567;  modifications  of 

note  system,  568 


Land,  fails  as  security  for  bank- 
notes in  England,  87;  leads 
to  collapse  of  Ayr  Bank,  147; 
causes  failure  in  Ireland,  173; 
failure  as  security  in  Belgium, 
277;  failure  in  Paraguay,  519; 
causes  difficulties  at  Bank  of 
Algeria,  539;  evil  results  in 
Australia,  544-45,  696;  causes 
mortgage  bank  failures,  705 

Land  Bank,  projected  by  Cham- 
berlain, 84;  collapses,  85 


Latin  America,  proposals  for 
bringing  about  stable  mone- 
tary conditions  in,  499 

Latin  Union,  conference  of  1893 
regarding  the  redemption  of 
Italian  subsidiary  coins,  26; 
originated  in  proposition  from 
Belgium,  61 ;  attempts  to  main- 
tain circulation  of  silver,  62; 
makes  gold  primary  money, 
62 ;  limitation  of  silver  coinage, 
64;  effect  of  the  Union  upon 
Bank  of  France,  65 ;  causes 
difficulties  in  Belgium  in  regard 
to  exchange  of  minor  coins,  282 

Law,  John,  founds  Compagnie 
d  Occident,  33;  contracts  with 
French  Government,  35;  con- 
tinued issues  of  stock,  36; 
collapse  of  the  system  and 
attack  upon  Law,  39 

Legal  tender,  in  Italy,  18,  19, 
24;  in  France,  38,  51,  54;  in 
England,  98,  118;  in  the  Ger- 
man States,  193;  in  German 
Empire,-  215,  218;  in  Austria, 
226,  231;  in  United  States,  401; 
in  Canada,  461 ;  in  Algeria, 
539;  in  New  South  Wales,  545 

Legal-tender  notes,  President 
Cleveland  recommends  retire- 
ment of,  689,  693 

Leipzig,  Bank  of,  failure  in  1900, 

705 

Leo  the  Wise,  edicts  regarding 
money-changers,  6 

Lidderdale,  William,  skilful  man- 
agement of  Bank  of  England 
in  1890,  664 

Limantour,  J.  Y.,  author  of 
Mexican  law  of  1897,  482; 
prepares  for  monetary  reform 
in  Mexico,  486;  presents  meas- 
ure for  gold  exchange  standard, 
491;  establishes  commission  on 
money  and  exchange,  494 

Limited  liability,  adoption  of,  in 
Great  Britain  in  1858,  151; 
modified  in  1879,  152 

Lombards  act  as  bankers  in  Italy, 

London,  made  site  of  Bank  of 
England,  91 ;  merchants  of, 
plan  opposition  to  Bank  of 
England,  99;  fall  of  exchange 


INDEX 


775 


London — Continued, 

with  Hamburg,  104;  increase 
in  use  of  credit  instruments  in, 
109;  monopoly  of  note  issue 
in,  under  Act  of  1826,  116; 
concentration  of  bankers'  bal- 
ances in,  131;  banks  of,  ex- 
tend relations  with  provincial 
banks,  132;  centre  of  foreign 
exchange  operations,  136; 
changes  in  discount  rate,  138; 
position  of  branches  of  Scotch 
banks  in,  158;  rate  of  exchange 
with  Rio  de  Janeiro,  501; 
India  Council  drafts  drawn  on, 
578;  bills  drawn  on,  in  the 
Straits,  594;  issues  of  new 
capital  in,  702;  demands  for 
gold  converge  upon,  in  1907, 
716;  money  market  conditions 
in,  at  outbreak  of  European 
war,  749 

London  and  River  Plate   Bank, 

5r7 
London    Stock   Exchange,    closes 

on  July  31,  1914,  739 
Louisiana,  banking  system  of,  385 


M 


McAdoo  William  G.,  confers  on 
Federal  Reserve  Act,  723;  par- 
ticipates in  division  of  reserve 
districts,  734;  takes  measures 
to  check  war  panic,  745 

McCleary,  James  T.,  introduces 
banking  measure  in  Congress, 

43 ! 

McCulloch  vs.  Maryland,  decided 
by  Marshall,  344 

McCulloch,  Hugh,  appointed 
Comptroller  of  the  Currency, 
409;  recommends  taxation  of 
State  bank-notes,  411;  recom- 
mends resumption,  415 

McKinley,  William,  nominated 
for  President  on  gold  platform, 
429;  election  as  President  re- 
stores confidence,  698 

Madison,  James,  suggests  a  na- 
tional bank,  343;  change  of 
constitutional  views,  344 

Maine,  banking  laws  of,  363; 
specie  in  banks  in  1861,  388 


Manchuria,  issue  of  notes  in,  by 
Bank  of  Russia,  271;  issue  of 
war  notes  in,  by  Japan,  565; 
issue  of  notes  in,  by  Yokohama 
Specie  Bank,  603;  demand  for 
money  in,  in  1905,  608 

Marshall,  John,  decision  regarding 
national  bank,  344 

Martinque,  Bank  of,  533 

Massachusetts,  Land  and  Manu- 
facturing Bank,  334;  early 
banking  laws  of,  360;  banks 
maintain  specie  payments,  361 ; 
increase  in  banks  prior  to 

Eanic  of  1837,  362;  Suffolk 
anking  system  of,  365-69 

Matsukata,  Count,  fixes  rate  of 
exchange  for  Chinese  indem- 
nity to  Japan,  561 

Mauritius,  banking  in,  551 

Medici,  establish  banking  houses 
in  Europe,  8 

Mercantile  National  Bank,  ap- 
peals to  New  York  Clearing 
House  for  aid,  712 

Mexican  dollars,  wide  distribu- 
tion of,  486;  free  coinage  of, 
suspended,  491;  use  in  Philip- 
pines, 585;  ratio  of  value  to 
American  money,  586;  sub- 
stitute for,  proposed  in  the 
Straits,  594;  demand  for,  in 
China,  598;  restrictions  im- 
posed in  French  Indo-China, 
608 

Mexico,  early  monetary  history 
of,  480;  the  banking  of  act 
1897,  482;  creation  of  the 
Central  Bank  of  Mexico,  485; 
appointment  of  monetary  com- 
mission to  consider  metallic 
standard,  487;  negotiations  with 
European  Powers,  488;  mone- 
tary reform  of  1904,  490-93; 
changes  in  character  of  metallic 
money  stock,  495;  changes  in 
banking  law  in  1908,  496; 
disturbing  effects  of  revolution, 

497 

Mexico,  National  Bank  of,  founda- 
tion of ,  481;  surrenders  special 
privileges,  484;  resources  of, 

497 

Michigan,  wildcat  banking  in, 
376-77 


INDEX 


Middle  Ages,  inherited  banking 
methods  from  antiquity,  6; 
position  of  the  Jews  in,  14 

Mississippi  Company.  See  Com- 
pagnie  des  Indes 

Mississippi,  failure  of  State  banks 
in,  382-83 

Missouri,  banking  in,  385 

Monetary  Commission,  Indian- 
apolis, membership  and  report, 
430-31;  authorized  by  Aldrich- 
Vreeland  law,  445;  appointed 
in  Mexico  in  1903,  487;  ap- 
pointed by  Japan  in  1893,  560 

Monetary  conferences,  interna- 
tional, in  1878,  675;  in  1881, 
675; in  1892,  676 

Montreal,  Bank  of,  foundation, 
449;  favors  secured  circulation, 
458;  guarantees  liabilities  of 
Ontario  Bank,  469;  guarantees 
advances  to  banks  in  1907,  476 

Moratorium,  declared  by  Eu- 
ropean governments  at  out- 
break of  war,  739 

Morgan,  J.  Pierpont,  syndicate 
contract  with  Treasury  in  1895, 
690-92;  subscription  to  loan 
of  1896,  694;  organizes  United 
States  Steel  Corporation,  709; 
averts  disaster  in  1907,  714 

Morocco,  State  Bank  of,  541 

Morris,  Robert,  founds  Bank  of 
North  America,  335 

Mortgages  as  security  for  bank- 
notes. See  Land 


N 


Naples,  Bank  of,  foundation, 
20;  illegal  circulation  in  1893, 
22;  limitation  of  note  issues,  25; 
balance-sheet  of,  31 

Nassau  Bank,  provides  currency 
for  Bahamas,  532 

Natal,  banking  in,  550 

Nation,  Bank  of  the,  established 
in  Argentine  Republic,  507; 
aids  in  restoring  stability  of 
exchange,  510 

National  banking  system  of  the 
United  States,  comparison  with 
State  systems,  392-94;  origi- 
nates in  difficulties  of  the 
Treasury,  397-405 ;  Secretary 


Chase's  plans,  406;  rules  govern- 
ing circulation,  408;  taxation  of 
State  notes,  411-12;  changes  in 
circulation,  413-15;  extension 
of  charters,  419;  effect  of  Bland 
Act  and  Sherman  Act,  421; 
redemption  of  notes,  422 ;  exami- 
nations, 423;  plans  of  reform 
under  President  Cleveland,  425; 
Baltimore  plan,  426;  plan  of 
Secretary  Carlisle,  427;  pro- 
posals of  Indianapolis  Mone- 
tary Commission,  431;  changes 
made  by  Act  of  1900,  432; 
increase  of  small  banks,  434; 
progress  of  circulation  from 
1896  to  1908,  435;  reformatory 
measures  of  New  York  Chamber 
of  Commerce,  439 ;  proposals  of 
American  Bankers'  Association, 
440;  measure  of  Representative 
Fowler,  441 ;  changes  in  security 
for  notes  under  Aldrich-Vree- 
land  law,  443;  appointment  of 
National  Monetary  Commission 
445;  modifications  proposed  in 
reserve  requirements  by  Aldrich 
plan,  447;  failures  in  1893, 
674,  679;  expansion  of  banking 
capital,  683;  effect  of  the  reserve 
system,  683-84;  defects  of, 
shown  in  panic  of  1907,  707; 
breaks  down  under  strain  of 
currency  demand,  714 

National  Banks,  compelled  to 
enter  federal  reserve  system, 
724;  ability  to  rediscount,  727; 
disposition  of  bonds  held  by, 
729;  changes  in  reserve  require- 
ments of,  730;  power  to  estab- 
lish foreign  branches,  732 

National  Reserve  Association, 
proposed  by  National  Mone- 
tary Commission,  445;  required 
to  take  over  two  per  cent,  bonds, 
446;  character  of  business  to  be 
carried  on,  447;  opposed  by 
Democratic  National  Conven- 
tion, 722 

Necker,  Jacques,  exacts  secret 
loans  from  Caisse  d'Escompte, 
42 

Netherlands,  Bank  of,  succeeds 
Bank  of  Amsterdam,  289;  sys- 
tem of  taxation,  290;  method 


INDEX 


777 


Netherlands  Bank  of — Con'd 
of  maintaining  gold  standard, 
291;  changes  in  discount  rate, 
292;     annual     statistics,     293; 
relations  with  Bank  of  Java,  571 

New  Brunswick,  banking  in,  early 
charters,  453;  brought  under 
Canadian  law,  458;  branches, 
462 

New  Caledonia,  banking  in,  553 

New  England  banks,  illustrated 
by  Massachusetts  system,  360; 
legislation  in  Maine  and  Ver- 
mont, 360;  in  Rhode  Island, 
364;  Suffolk  system,  365-69; 
suspension  of  1861,  369;  effect 
on  circulation  and  specie  re- 
serves, 387-88;  comparison 
with  other  systems,  392-93 

New  Hampshire  banks,  retain 
their  specie,  388 

New  South  Wales,  issue  of  govern- 
ment notes  in,  545;  Bank  of, 
548 

New  York,  early  banking  charters, 
in,  370;  adopts  safety  fund 
plan,  371;  reasons  for  bank 
failures,  373;  free  banking  act, 
374;  issues  by  individuals,  375 

New  York  Chamber  of  Com- 
merce, appoints  special  com- 
mittee on  the  currency,  437; 
adopts  report  in  favor  of 
central  bank,  439 

New  York  City,  banks  of,  make 
advances  to  Treasury  in  1861, 
397;  suspend  specie  payments, 
400;  resumption  of  specie  pay- 
ments in  1838,  531;  restrict 
discounts  in  1893,  674;  volume 
of  clearings  at,  699;  causes 
affecting  money  market  in 
1903  and  1907,  706;  provision 
for  reserves  by  trust  companies, 
708 ;  panic  on  stock  exchange  in 
1901,  709;  failure  of  city  loan, 
711;  failure  of  copper  pool,  712; 
runs  upon  trust  companies, 
713;  banks  aided  by  the  Trea- 
sury, 714;  appearance  of  premi- 
um on  currency,  715;  recovery 
in  lawful  money  reserves,  720; 
impairment  of  reserves  on  eve 
of  European  war,  745;  arrange 
for  protecting  credit  of  City  of 


New  York,  748;  restoration  of 
normal  reserves  in  October, 
1914,750 

New  York  Clearing  House,  re- 
quires trust  companies  to 
accumulate  reserves,  708;  de- 
mands resignations  of  bank 
officers  in  1907,  713;  authorizes 
issue  of  Clearing  House  certifi- 
cates, 714;  authorizes  loan 
certificates  on  eve  of  European 
war,  745 

New  York  Stock  Exchange,  closes 
on  July  31,  1914,  738 

Nicaragua,  banking  in,  528 

Norway,  Bank  of,  foundation, 
296;  system  of  circulation,  297; 
statistics  of,  298 

Nova  Scotia,  banking  in,  early 
charters,  453;  brought  under 
Canadian  law,  458 


O 


Ohio,  State  Bank  of,  376 

Orient,  conditions  of  banking 
dominated  by  value  of  silver, 
569;  business  affected  by  ex- 
change with  gold  countries,  593 

Overend,  Gurney  &  Company, 
conduct  in  crisis  of  1825,  622; 
suspension  in  1866,  649 

Overstone,  Lord,  advocates  cur- 
rency principle,  120 

Owen,  Robert  L.,  participates  in 
conference  on  Federal  Reserve 
Act,  723 


Palmstruch,  founder  of  Bank  of 
Sweden,  293 

Panama,  makes  currency  agree- 
ment with  United  States,  523 

Panama  Canal,  issue  of  bonds 
for,  434 

Paper  currency,  losses  by  wear, 
428,  note 

Paper  money,  in  Italy,  21,  25; 
in  France,  43;  in  the  German 
states,  207;  in  Austria,  220- 
28;  in  Russia,  251-56;  in 
United  States,  399-401;  in 
Canada,  449,  457,  459;  com- 
parative stability  in  Brazil 


7/3 


INDEX 


Paper  money,  in  Italy — Con'd 
prior  to  1888,  500;  excessive 
issues  in  Brazil  under  the 
Republic,  501;  contraction  in 
Brazil  and  improvement  of 
exchange,  505;  excessive  issues 
in  Chile,  513;  depreciation  in 
Colombia,  522;  issues  in  Gua- 
temala, 528;  legal-tender  issues 
in  Haiti,  529;  employment 
in  Japan,  555;  authorized  in 
British  India,  in  1861,  574; 
early  issues  in  China,  596 

Paraguay,  banking  in,  518;  crea- 
tion of  new  state  bank,  519 

Paris  Brothers,  financial  opera- 
tions of,  13 

Paterson,  William,  plan  for  Bank 
of  England,  81;  organizes 
Darien  Company,  139 

Peel,  Sir  Robert,  supports  re- 
sumption by  Bank  of  Eng- 
land, 113;  adopts  "  currency 
principle,"  120;  admits  par- 
tial failure  of  Act  of  1844,  124 

Pennsylvania,  Bank  of,  335 ;  bank- 
ing mania  in,  617 

Persia,  Imperial  Bank  of,  542 

Peru,  early  monetary  history  of, 
520;  adoption  of  gold  exchange 
standard,  521 

Philippine  Islands,  early  banking 
history  of,  585;  currency  con- 
fusion at  American  occupation, 
586;  adoption  of  gold  exchange 
standard,  587;  change  in  weight 
of  silver  unit,  588;  modifica- 
tion of  charter  of  Spanish- 
Filipino  Bank,  589 

Philostephanos,  first  Greek  banker, 
2 

Pitt,  William,  demands  of,  upon 
Bank  of  England,  95-97 

Porto  Rico,  banking  in,  526 

Portugal,  dependencies  of,  af- 
forded banking  facilities  by 
Ultramarine  Bank,  554 

Portugal,  Bank  of,  scope  of 
privileges,  320;  relations  with 
the  state,  321 

Prices,  advanced  by  Berlin  decree, 
614;  affected  by  fall  of  Napoleon 
616 

Provincial  Bank  of  Ireland,  178 

Prussia,    law    regarding    circula- 


tion of  foreign  bills,  193; 
adopts  centralizing  policy  in 
banking,  195 

Prussia,  Bank  of,  origin,  187; 
importance  of  circulating  notes, 
189;  accumulates  stock  of  gold, 
199;  converted  into  Imperial 
Bank,  200;  contest  with  Bank 
of  Brunswick,  207;  refuses 
speculative  paper  in  1873,  657 

Publicans,  functions  of,  in  Rome, 
5 


Raigosa,  G.,  supports  plan  for 
exchange  fund,  492 

Railways,  aided  by  Bank  of 
France,  53;  mania  in  1847, 
632;  mileage  up  to  1857,  637; 
new  method  of  financing,  646; 
absorption  of  capital  by,  up  to 
1873,  653;  loss  of  earnings  in 
1894,680 

Redemption  of  bank-notes,  re- 
gulations in  Germany,  214; 
method  under  national  bank- 
ing system,  422-23;  method  in 
Canada,  465 

Redemption  of  United  States 
notes,  689,  693 

Rediscounting,  practised  at  Im- 
perial Bank  of  Germany,  213; 
method  proposed  for  National 
Reserve  Association,  447 ; 
powers  of  Federal  Reserve 
Banks  in  relation  to,  727; 
success  of,  during  European 
war,  750;  at  Bank  of  England, 
752;  at  Bank  of  Germany,  753; 
at  Bank  of  France,  754 

Referendum,  in  Switzerland,  on 
question  of  state  bank,  308 

Relief  laws  in  Kentucky,  380 

Reserve  requirements,  under  plan 
of  National  Monetary  Com- 
mission, 447;  operation  of, 
under  national  banking  law, 
683;  under  Federal  Reserve 
Act,  728;  modified  in  respect 
to  national  banks,  730 

Restriction  of  cash  payments  in 
England,  98;  effect  upon  value 
of  bank-notes,  101-04;  brought 
to  an  end,  114 


INDEX 


779 


Resumption,  recommended  by 
Secretary  McCulloch,  415;  sup- 
ported by  national  banks,  416 

Reunion,  Bank  of,  552 

Rhode  Island,  law  for  recovery 
of  bank  debts,  364;  agency  of 
Suffolk  redemption  system,  366 

Ridgely,  William  B.,  recommends 
central  bank,  440 

Roman  Bank,  foundation,  20; 
illegal  circulation  of,  22 ;  assets 
assumed  by  Bank  of  Italy,  27 

Rome,  acquires  banking  methods 
from  Greece,  4;  methods  of 
Publicans  in,  5 

Rothschilds,  funded  loan  to 
Brazil,  503 

Roumania  National  Bank  of, 
322-23 

Royal  Bank  of  Scotland,  created 
from  the  Equivalent  Fund,  145; 
establishes  branch  in  London, 
158;  establishes  cash  credits, 
166 

Russia,  paper-money  issues  in, 
251;  efforts  to  restore  specie 
payments,  253-56;  new  indus- 
trial policy,  259;  steps  towards 
gold  standard,  262;  discussion 
of  rate  of  conversion  of  paper 
money,  263-64;  new  coinage 
system,  266;  pressure  of  1899, 
269 ;  maintenance  of  gold  stand- 
ard during  war  with  Japan, 
270;  loan  to  Bank  of  France  in 
1847,  635;  exchange  of  silver 
with  Bank  of  France  in  1861, 
645;  loans  to  Bank  of  England 
in  1890,  665;  investment  of 
French  capital  in,  702 ;  specula- 
tions in,  705 

Russia,  Bank  of,  close  relations 
with  the  state,  251;  origin  and 
capital,  254;  plans  for  specie 
resumption,  256;  revision  of 
charter,  257;  rules  for  circula- 
tion under  law  of  1897,  267; 
policy  during  pressure  of  1899, 
269;  changes  in  discount  rate 
during  Japanese  War,  271; 
annual  statistics,  273;  raises 
discount  rate  under  pressure  of 
European  war  panic,  739;  gold 
holdings  of,  on  eve  of  European 
war,  743 ;  issues  small  notes,  743 


Russo-Chinese  Bank,  origin  and 

objects  of,  602 
Russo-Japanese    War,    effect    on 

Bank  of  Russia,  269-72;  effect 

on  Bank  of  Japan,  564-65;  cost 

of,  700 


Safety  fund  system,  adoption 
in  New  York,  371;  failure  and 
its  causes,  371-72 

St.  George,  Bank  of,  origin,  10; 
not  adapted  to  modern  condi- 
tions, 17 

St.  Thomas,  theory  in  regard  to 
interest,  15 

Salvador,  banking  in,  529 

Santo  Domingo,  abortive  effort 
to  maintain  gold  standard,  530 

Sardinia,  National  Bank  of,  cre- 
ated in  1849,  18;  reorganizes 
as  National  Bank  of  Italy,  19 

Schiff,  Jacob  H.,  proposes  action 
on  currency  by  New  York 

-  Chamber  of  Commerce,  437 

Scotch  banking  system,  early 
history  of,  142-47;  strength 
during  specie  suspension,  149; 
failure  of  the  Western  and 
City  of  Glasgow  Banks,  150- 
54;  limited  liability,  154-56; 
proposal  to  abolish  Scotch 
note  issues,  157;  recent  amal- 
gamations, 170 

Scotland,  banking  in,  142-70; 
origin  of  accommodation  bills 
in,  612;  failure  of  Western 
Bank,  641;  failure  of  City  of 
Glasgow  Bank,  658 

Scotland,  Bank  of,  foundation, 
143;  increase  of  capital,  148; 
application  for  limited  liability, 
156;  establishes  branch  in 
London,  158;  absorbs  Cale- 
donian Bank,  170 

Securities,  introduced  in  France 
by  John  Law,  35;  effect  of 
French  indemnity  loan  upon 
price  of,  59-60;  tendency  to 
return  to  country  of-  origin, 
239;  effect  of  official  sales  in 
France,  619;  new  method  of 
financing,  646;  extension  in 
France,  659;  effect  on  trade 


;So 


INDEX 


Securities —  Continued 

statistics,  660;  American,  held 
in  Europe,  670;  shrinkage  in 
dividends  in  1895,  673;  output 
of,  after  1896,  701;  amount 
outstanding  in  United  States 
and  other  countries,  702 ;  issued 
to  carry  out  industrial  combi- 
nations, 708;  decline  in  1907, 
711;  not  available  for  redis- 
count by  Federal  Reserve 
banks,  731 

Senegal,  banking  in,  551-52 

Seoul  Note  Association,  provides 
credit  in  Korea,  568 

Servia,  National  Bank  of,  324-26 

Sherman  law,  effect  on  bank 
circulation,  421 ;  efforts  of  Presi- 
dent Cleveland  to  repeal,  668; 
effect  on  gold  exports  and 
Treasury  reserve,  671;  repealing 
bill,  684;  action  in  House,  685; 
repeal  of,  686 

Shimoneseki,  Treaty  of,  pro- 
vides for  indemnity  to  Japan, 
560 

Siam,  banking  in,  604;  efforts  to 
establish  stable  exchange,  605 

Sicily,  Bank  of,  foundation,  20; 
illegal  circulation  in  1893,  22; 
limitation  of  circulation,  25 

Silver,  flight  of  subsidiary,  from 
Italy,  26;  fluctuations  embar- 
rass Bank  of  France,  60; 
causes  formation  of  Latin 
Union,  62;  change  in  commer- 
cial ratio  of,  63;  limitation 
of  coinage,  64;  effect  upon 
circulation  of  Bank  of  France, 
66;  disappears  from  England, 
101;  principal  metallic  stock 
of  Germany,  196;  standard  of 
Bank  of  Hamburg,  198;  place 
in  Austrian  circulation,  236- 
38;  causes  disturbance  in  Servia, 
325;  Democratic  declaration 
for  free  coinage  of,  in  1896, 
429;  decline  of,  deranges  Mexi- 
can finances,  486;  considered 
by  Mexico  and  United  States  in 
relation  to  international  ex- 
change, 488;  change  of  ratio  in 
Mexico,  490;  injurious  effects  of 
decline  upon  export  trade,  490; 
rise  in  price  of,  in  1905,  493; 


exports  of,  from  Mexico  in 
1906,  495;  causes  disturbance 
of  confidence  in  Uruguay,  517; 
rise  of  price  causes  exporta- 
tion from  Peru,  521;  standard 
of  value  in  Bolivia,  525;  used 
in  Cuba,  526;  rate  of  conver- 
sion of  Chinese  war  indemnity, 
561 ;  abandoned  as  standard  in 
Japan,  562;  effect  of  change  in 
Japan  upon  prices,  563;  de- 
mand for,  in  1900,  causes  ex- 
portations  from  Korea,  567; 
fluctuations  of,  disturb  trade 
of  the  Orient,  569;  use  of,  in 
Java,  571;  decline  of,  causes 
disturbance  in  British  India, 
577;  purchases  of,  by  Indian 
Government,  581;  becomes 
standard  in  the  Philippines, 
585;  demand  for,  at  Peking  in 
1900,  586;  fall  of,  compels 
special  inquiry  in  Straits  Settle- 
ments, 591;  use  of,  in  China, 
598;  proposed  as  basis  for 
Chinese  currency,  600;  free 
coinage  of,  suspended  in  Siam, 
604;  causes  special  inquiry 
in  French  Indo-China,  608; 
method  of  fixing  value  of,  in 
Indo-China,  609;  international 
conferences  on,  674-77;  effect 
of  suspension  of  coinage  in 
India,  677 

Singapore  Chamber  of  Commerce 
favors  gold-exchange  standard, 

593 

Small  notes,  advantages  to  Scotch 
industry,  162;  demand  for, 
in  United  States,  432 ;  extension 
of  use  in  Europe,  742 

Socialism,  influence  on  charter  of 
National  Bank  of  Belgium,  284 

South  Africa,  banking  in,  548; 
National  Bank  of,  549;  cost 
of  war  in,  699 

South  Sea  Company,  contest 
with  Bank  of  England,  90 

Sovereign  Bank  of  Canada,  sus- 
pension in  1908,  470 

Spain,  relations  of  government 
with  Bank  of  Spain,  314;  re- 
forms in  budget,  316;  measures 
to  control  exchange,  317;  cost 
of  war  with  United  States,  700 


INDEX 


781 


Spain,  Bank  of,  early  history, 
312;  extensions  of  charter, 
313-14;  difficulties  during  war 
with  the  United  States,  315; 
reformation  under  Villaverde, 
316;  efforts  to  increase  com- 
mercial business,  318 

Spanish-Filipino  Bank,  charter 
of,  585 ;  modification  of  charter, 

589 
Specie  circular,  issue i  by  Jackson, 

625 
Standard  Bank  of  South  Africa, 

549 

Standard  Oil  Company  of  In- 
diana, fine  imposed  upon,  711 

State  banks,  suspension  of  pay- 
ments in  1814,  341;  notes  held 
exempt  from  federal  taxation, 
346,  note;  compelled  to  re- 
sume, 346;  variety  of  systems 
in  the  United  States,  359;  in 
Massachusetts,  360-63 ;  other 
New  England  States,  363-65; 
New  York,  370-75;  Ohio,  376; 
Michigan,  376;  other  Western 
States,  377;  Kentucky,  379- 
80;  other  Southern  States, 
381-85;  Indiana,  386;  effects 
of  the  Civil  War  upon  the 
system,  387-89;  advantages 
and  disadvantages  of,  391-94; 
limited  circulation,  395;  ad- 
vances to  the  Treasury  in  1861, 
397;  suspend  specie  payments, 
400;  subjected  to  tax  on  circula- 
tion, 412;  proposed  revival  of, 
425;  growth  in  resources  of, 
707 

Stock-jobbing,  acts  against,  ex- 
tended to  American  colonies, 
335;  adoption  of  act  in  Eng- 
land, 611 

Straits  Settlements ,  banking  in, 
590;  plans  for  stable  exchange 
in.  593;  adoption  of  gold  ex- 
change standard,  594 

Suez  Canal,  654 

Suffolk  system  of  redemption, 
origin  of,  366;  effect  of  opera- 
tion, 367;  rivalry  of  Bank  of 
Mutual  Redemption,  368 ;  econ- 
omy of  system,  369,  422 

Sugar,  crisis  in  market  affects 
Bank  of  Reunion,  553 


Surplus,  distribution  of,  among 
the  States,  626 

Sweden,  monetary  system  of, 
293;  adopts  policy  of  central 
bank,  294;  banking  statistics, 
296 

Sweden,  State  Bank  of,  founda- 
tion in  1656,  293;  is  given 
monopoly  of  note  issue,  294; 
character  of  operations,  295 

Switzerland,  legislation  regarding 
silver,  61;  early  banks  of,  302; 
formation  of  Concordat,  304; 
efforts  to  rectify  adverse  ex- 
change, 305-07;  efforts  to 
secure  a  central  bank,  308; 
character  of  new  institution, 
309-1 1 ;  statistics  of  Swiss  banks, 

311 

Switzerland,  National  Bank  of, 
created  in  1905,  308;  organiza- 
tion of,  309;  control  of  note 
issues,  310;  policy  in  crisis  of 
I9°7»  312;  authorized  to  issue 
small  notes,  741 

Sydenham,  Lord,  supports  cur- 
rency principle  for  Canada,  455 

Syndicate  contract  of  1895,  690-93 


Taiwan,  Bank  of,  provides  cur- 
rency for  Formosa,  566 

Takahashi,  Korekiyo,  arranges 
war  loans  for  Japan,  565 

Taney,  Roger  B.,  changes  method 
of  depositing  public  funds, 

354 

Taxation  of  banks,  system  at 
Bank  of  France,  76;  at  Bank 
of  England,  140;  at  Imperial 
Bank  of  Germany,  215-16; 
in  Austria-Hungary,  249;  ex- 
tended in  Belgium,  284;  at 
Bank  of  the  Netherlands,  290; 
at  Bank  of  Portugal,  321; 
national  banks  in  United  States 
exempt  from  special  taxes  by 
States,  344;  federal  taxation  of 
State  notes,  346;  tax  of  1865 
on  State  notes,  41 1 ;  effect  on 
circulation,  412;  repeal  recom- 
mended by  Democratic  con- 
vention of  1892,  425;  repeal 
favored  by  Secretary  Carlisle, 


782 


INDEX 


Taxation  of  banks — Continued 
427;  under  Aldrich-Vreeland 
law,  445;  imposed  on  emer- 
gency issues  in  Canada,  477; 
as  fixed  by  Federal  Reserve 
Act,  728 

Tennessee,    State    Bank    of,    385 

Thiers,  manages  French  war  in- 
demnity, 57;  opinion  of  Bank 
of  France,  68,  note 

Tipperary  Joint-Stock  Bank, 
foundation,  181;  peculations  of 
John  Sadlier,  182 

Transvaal,  banking  in,  550 

Trust  companies,  withdraw  from 
New  York  Clearing  House, 
708;  runs  upon,  in  1907,  713 

Turkey,  banking  in,  331-33;  influ- 
ence of  crop  failure  in  1907,  333 

Tuscany,  National  Bank  of, 
foundation,  20;  fusion  with 
national  bank,  23 


U 


Ultramarine  Bank,  554 
Union  Generate,  failure  of,  66 1 
United  States,  banking  history 
of,  334-447 ;  suspension  of  specie 
payments  in  1814,  618;  crisis 
of  1837,  623-27;  exports  of 
1847,  631;  railway  extension  in 
1 857, 637 ;  changes  in  circulation, 
639;  crisis  of  1857,  640;  effect 
of  Civil  War,  644;  crisis  of  1873, 
655-56;  crisis  of  1884,  66i; 
crisis  of  1893,  668-94;  trade 
expansion  in,  after  1896,  700; 
crisis  of  1907,  701;  value  of 
outstanding  securities  in,  702; 
defects  of  currency  system  of, 
707;  widening  of  speculative 
field  in,  708;  changes  in  foreign 
trade  movement  in  panic  of 
1907,  717;  commercial  failures 
in,  718;  gold  holdings  on  eve 
of  European  war,  743 
United  States,  banking  in.  See 
United  States,  Bank  of;  State 
Banks;  and  National  Banking 
System 

United  States,  Bank  of,  origin, 
335  J  relation  with  Treasury, 
337-39;  expiration  of  charter, 
340;  plans  for  second  bank, 


342-43;  constitutional  opposi- 
tion to  the  new  bank,  344; 
case  of  McCulloch  vs.  Mary- 
land, 345;  specie  resumption, 
346;  branch  drafts,  349;  arouses 
hostility  of  Jackson,  350-52; 
removal  of  the  deposits,  354;' 
origin  of  sub-Treasury  system, 

355-57 

Uruguay,  rules  governing  banks 
of  issue,  516;  confusion  caused 
by  issue  of  silver  notes,  517 


Van  Buren,  Martin,  recommends 
safety  fund  system,  370;  calls 
extra  session  of  Congress,  627 

Vansittart,  Nicholas,  opposes  bul- 
lion report,  II 

Venezuela,  banking  in,  522 

Venice,  origin  of  banking  in,  7; 
errors  regarding  early  history,  9 

Vermont,  banking  in,  363;  en- 
courages Suffolk  system,  368 

Vienna,   speculation  in,  in   1873, 

.657 

Vienna,  Bank  of,  creation  and 
failure,  221 

Vienna  Stock  Exchange,  closes  on 
eve  of  European  war,  738 

Villaverde,  Sefior,  restores  order 
to  Spanish  finances,  316;  seeks 
extension  of  commercial  rela- 
tions of  Bank  of  Spain,  318 

Vreeland,  Edward  B.,  introduces 
currency  measure,  442;  made 
member  of  Monetary  Com- 
mission, 446 

W 

Webster,  Daniel,  favors  creation 
of  a  commercial  bank,  342; 
opinion  in  favor  of  branch 
drafts,  349 

West  Africa,  Bank  of,  552 

Western  Bank  of  Scotland,  adopts 
policy  hostile  to  that  of  other 
Scotch  banks,  151;  heavy  losses 
and  failure  of,  152;  effect  of 
failure,  641 

Wilson,  William  L.,  bill  to  repeal 
Sherman  law,  684;  bill  to  author- 
ize gold  bonds,  690 


INDEX 


783 


Wisconsin,  failed  banks  in,  378; 

decline   in    Southern   securities 

deposited  to  secure  notes,  388- 

89 
Witte,    Count,    proposes    special 

issues    of    paper,    259;    checks 

speculation  in  the  rouble,  263; 

supports    gold    standard,    264; 

urges  equilibrium  in  the  budget, 


278;  warns  against  speculation, 
705 


Yokohama  Specie  Bank,  aids  in 
accumulation  of  gold   reserve, 


By  James  Albert  Woodburn 

(Professor  of  American  History  and  Politics,  Indiana  University) 

The  American  Republic  and  Its  Government. 

An  Analysis  of  the  Government  of  the  United 
States,   with   a   Consideration   of   its   Funda- 
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